November 19, 2001
Of quasi-horses, quasi-donkeys,
By Bill Singer
I of this series, I set forth the proposition that the courts have
promulgated a heads-I-win-tails-you-lose standard for the self-regulatory
organizations (SROs). When registered persons sue the SROs, the courts
effectively shield the regulators with quasi-governmental absolute immunity.
However, when those same registered persons assert their Fifth Amendment
right against self-incrimination before those same SROs, the courts sustain the
regulators’ refusals to recognize that right by finding that the regulators
are private entities not capable of government action. Forgetting for the moment the issue of whether an SRO can
“incriminate” anyone, the simple fact remains that at any given point in
time, the courts are capable of deeming SROs both private entities and
governmental (or quasi-governmental) entities.
proposition is simple: can an
entity at any given point in time be both governmental and private?
I believe that the commonsense answer is “no.”
You’re either an official organ of the government or you are a private
enterprise. The United States
Senate is not a private sector equivalent of Macy’s.
Microsoft is not the governmental equivalent of the United States
Department of Justice. We intuit
the differences even in the absence of an ability to succinctly explain them.
However, in the world of finance, at the fringes of local government and
its constituents, we often find hybrids of governmental/private sector cloning.
Bonds are issued by government-sanctioned organizations, which, in turn,
function competitively in the private sector.
Municipalities and counties license private businesses to operate on
government property. These almost
private, almost public manifestations are frequently referred to as
“quasi-governmental” --- they’re almost like a government entity but not
quite. Nonetheless, the fact is
clear: such entities are not
private, are not governmental,
but, rather, a third, quite different mutation.
Quasi-Private --- a term not used
we never seem to use the term “quasi-private.”
The reason for the disparity is obvious.
There are few legal concerns when a hybrid entity takes on the
characteristics of the private sector, provided that such a business does not
use its government ties to engage in anticompetitive practices.
However, when a hybrid entity has some government-like powers, when it
operates within the prerogatives of a sovereign, we must be careful.
Thus, quasi governmental isn’t merely a description it is a warning.
the courts have recognized the existence of quasi-governmental entities, one
should ask why there have not been similar judicial efforts to recognize that
individuals subject to regulation by those hybrid actors must have
quasi-governmental rights. If I am
called as a witness before a government agency conducting a civil investigation,
I am entitled to constitutional and statutory civil due process protections.
If I am a target/subject in a criminal investigation, I am entitled to
similar criminal due process protections. But
when the arena is one of a mixed metaphor, there is a danger.
investigations and subsequent disciplinary proceedings all too often occur
within some distant shadows, outside the pale of federal, state, or
administrative practice. The SROs
arrogate to themselves the right to do what they want, when they want --- even
to the extent that they proclaim that as private entities they are not subject
to constitutional due process obligations.
In diluting the impact of such extraordinary powers, the defenders of the
SRO system routinely assure its critics that the SROs are subject to
governmental oversight by the SEC, which must approve their rules and
regulations. I’ve never found
that explanation comforting. If the SROs are “subject” to governmental oversight, then
why aren’t they obligated to afford witnesses and respondents federally
guaranteed due process rights?
A criminal justice process by any other name
lawyer represents an individual before an SRO, that individual is technically
involved in a “civil” proceeding. There
is not supposed to be a government agency on the other side of the table. Your adversary is not supposed to be a state or federal
prosecutor. Your client does stand
accused of a “crime.” But, in
reality, everything about the process smacks of a government investigation, a
criminal prosecution, and a verdict that may deprive the respondent of his
career and imposes a substantial fine.
the following. Your client is
ordered to appear before an SRO to give on-the-record (OTR) testimony; at the
same time, he or she is the subject of a state or federal grand jury
investigation. As to the ongoing,
parallel criminal investigation, you are concerned that the self-incriminating
testimony that cannot be forced from your client by prosecutors will be
compelled by the SROs under threat of fine and suspension --- and any material
so obtained will likely be provided to the prosecutors by the SROs. That which prosecutors cannot legally obtain directly, they
can obtain indirectly from the SROs --- and, as demonstrated in the previous
article, the path between those two actors is well worn and well tended.
No one needs a road map or directions.
problem also surfaces in the absence of ongoing parallel criminal investigations
or proceedings. Among the more
common examples of this issue would be the client who received some cash
compensation over the years but didn’t declare the payments for tax purposes.
The mere admission of receiving such payment could result in an Internal
Revenue Service inquiry, with an attendant criminal prosecution.
The false denial of such payments could expose the witness to a
subsequent criminal prosecution for perjury.
Under the circumstances, an experienced practitioner might counsel the
client to assert the Fifth Amendment right against self-incrimination.
Fifth Amendment RIGHT against self-incrimination
important to remember that the assertion of the Fifth Amendment is a
constitutional right deemed so basic to the fabric of our society that
the framers of the Constitution included it within the Bill of Rights.
Historically, we have viewed efforts to coerce criminal convictions as
repugnant to our national sense of fairplay and decency.
Those who defend the present system of Fifth Amendment non-recognition by
SROs frequently argue that such regulators are not government entities capable
of pursuing criminal justice agendas and they do not have the power to convict
anyone of a crime. But that of course begs the question: Since the courts deem SROs to be quasi-governmental, are
they actually quasi-criminal justice organizations conducting quasi-criminal
investigations and adjudicating quasi-criminal indictments?
legitimate argument against recognizing the Fifth Amendment in SRO proceedings
would be to note that in any typical civil proceeding the assertion of the right
against self-incrimination still permits the judge or jury to draw a negative
inference. Note, however, that the
proper application is that the trier of fact “may” draw a negative
inference. The negative inference
is not mandatory. Further, it is
not the act of refusing to answer that is deemed criminal or tortious, but,
rather, one may infer from the invocation that the underlying misconduct
occurred. A legal nicety, yes --- but an important one within our system of
justice. Similarly, the assertion
of the Fifth within the context of a criminal trial is sacrosanct and deemed a
constitutional right not properly permitting a negative inference nor probative
of guilt. Simply put, in the United
States you cannot be convicted of a crime if the only evidence against you is
your refusal to incriminate yourself.
Is the assertion of a
constitutional right “unethical”?
What comes as a surprise to lawyers
unfamiliar with practice before the SROs is that those organizations do not
recognize the Fifth Amendment assertion and routinely initiate disciplinary
proceedings solely based upon the mere refusal to testify.
Again, let me underscore that point.
You can be charged with a violation of an SRO rule merely for declining
to incriminate yourself. And the
result of such a violation will likely be the loss of your right to pursue a
career in the securities industry, with many additional ramifications arising
from the loss of your industry registrations.
The SROs not only deem the refusal to incriminate oneself as a proper
basis for imposing a fine and suspension, but also deem the invocation of your
constitutional right to be an unethical practice.
of Enforcement v. Mario J. Coniglione[i],
registered representative Coniglione asserted his Fifth Amendment right against
self-incrimination during an NASD Regulation (NASDR) on-the-record interview (OTR).
Prior to that invocation, his counsel asserted his belief that the NASD
is a governmental agency and that his client was entitled to assert the Fifth
Amendment. The NASDR staff informed him that:
testimony has been requested in this matter pursuant to Procedural Rule 8210.
Rule 8210 requires any person associated with an NASD member to provide
all information requested by the staff. Therefore
please be advised that failure to answer any of our questions, ... [or] to
provide any information requested by the staff during this meeting ... could be
inconsistent with Rule 8210 and could be the basis for the initiation of
sanctions, including a bar, censure, suspension and/or fine.
staff then asked Coniglione questions relating to his prior employment with a
member firm. He refused to answer
each and every question asked of him, replying only, "I respectfully rely
on my Fifth Amendment right and decline to answer this question." Counsel for NASDR informed him that:
and NASD Regulation is not a government entity, so ... you have an obligation to
answer all of the Staff's questions .... I remind you if you continue to refuse
to answer the questions for whatever reason, whatever grounds, we will seek
disciplinary action for your failure to answer.
Respondent's continued refusal to respond to any of the NASDR staff's questions,
the NASDR staff concluded the interview. As
a result he was charged with violations of NASD Procedural Rule 8210 and NASD
Conduct Rule 2110. Conduct Rule
2110 imposes ethical standards upon the members and their associated persons to
observe “high standards of commercial honor and just and equitable principles
of trade.” Consequently,
Coniglione was charged with engaging in unethical behavior by invoking his
constitutional right against self-incrimination..
His unwillingness to incriminate himself constituted the sole basis for
the disciplinary proceeding and subsequent disbarment.
analyzing the bases for granting NASDR’s motion for summary disposition, the Hearing Officer concluded that a violation of Rule 8210 is also a violation of
Rule 2110. He further commented
that the Securities and Exchange Commission ("SEC") has stated that
have repeatedly stressed the importance of cooperation in NASD investigations.
We have also emphasized that the failure to provide information
undermines the NASD's ability to carry out its self-regulatory functions....
Failures to comply are serious violations because they subvert the NASD's
ability to carry out its regulatory responsibilities."
In re Joseph Patrick Hannan, Exchange Act Rel. No. 40438 (September 14,
1998) (omitting citations noted therein).
Officer Carleton reiterated that the Fifth Amendment prohibits only governmental
action, and that the NASD is a private entity
He then cited the NASD Sanction Guidelines ("Guidelines"),
which provide that in the case of a failure to respond, "a bar should be
Coniglione was barred for asserting his Fifth Amendment rights and refusing to
answer the Staff’s questions.
fact, the NASD is a quasi-governmental entity, how is it that Coniglione was
barred for invoking his Fifth Amendment right?
If he invoked that right in a criminal proceeding in any court in the
United States, no negative inference could be drawn and any finding of guilt
would be predicated upon the evidence introduced against him. If he invoked that right in a civil proceeding in any court
in the United States, a negative inference could be drawn, but any finding of
liability would still be predicated upon the evidence introduced against him.
Should the fact that the NASD is a quasi-governmental entity serve to
deprive Coniglione of those rights he would have had before a government entity?
Furthermore, assuming that the NASD now argues it is a private entity,
why does that fact render the assertion of one’s constitutional rights as
in a non-criminal environment . . . does it make sense?
a recent NASDR enforcement proceeding, OHO Order 01-13,[ii] Hearing Officer Andrew H. Perkins ruled on the
Department of Enforcement’s (DOE’s) obligations to produce various
documents, which Respondents claimed contained exculpatory evidence and were
discoverable under NASD Code of Procedure Rule 9251, and specifically under the
doctrine enunciated by the Supreme Court in Brady v. Maryland, 373 U.S.
83 (1963), as incorporated under Rule 9251(b)(2).
NASD Code of Procedure Rule 9251. Inspection and Copying of
Documents in Possession of Staff, sets forth requirements as to
documents that must be made available for inspection and copying by the
Departments of Enforcement and Market Regulation, and similarly sets forth those
standards under which such production may be withheld.
As Hearing Officer Perkins notes:
Department’s right to withhold documents under Rule 9251(b)(1) is itself
limited by Rule 9251(b)(2), which states: “Nothing in subparagraph (b)(1)
authorizes the Department of Enforcement . . . to withhold a document, or a part
thereof, that contains material exculpatory evidence.” “This provision is
intended to be consistent with the doctrine enunciated in Brady.” Notice of
Filing of Proposed Rule Change, Exchange Act Release No. 38,455, 1997 SEC LEXIS
959, at *14 n. 99 (Apr. 24, 1997) However, the NASD has not provided guidance on
how Brady, a criminal law doctrine, is to [be] applied in NASD disciplinary
proceedings. Hence, to set a
standard for its application, it is necessary to review the origins of Brady and
the manner in which it has been applied in other proceedings.
In explaining the origin of the
Brady Doctrine, Hearing Officer Perkins observes that
Brady and its progeny are concerned with the “special role played by the
American prosecutor in the search for truth in criminal trials.”
Strickler v. Greene, 527 U.S. 263, 281 (1999). As the Supreme Court
explained in Strickler,
United States Attorney is “the representative not of an ordinary party to
controversy, but of a sovereignty whose obligation to govern impartially is as
compelling as its obligation to govern at all; and whose interest, therefore, in
criminal prosecution is not that it shall win a case, but that justice shall be
quoting Berger v. United States, 295 U.S. 78l, 88 (1935).
arises out of consideration of the special role that American prosecutors
play within the criminal justice system.
The Supreme Court further acknowledged that such prosecutors are not mere
parties in litigation but representatives of a sovereign.
Which of course brings us back to a series of interesting questions.
Is the NASD a quasi-prosecutor? Are
NASD enforcement proceedings enmeshed in a quasi-criminal justice system?
Is the NASD a quasi-sovereign, i.e., a government-like power?
Hearing Officer Perkins seems somewhat uneasy in applying Brady to the
NASD’s proceedings. He candidly
the Supreme Court’s concern with the special role prosecutors play in the
American criminal justice system, it is not surprising to find that Brady has
not been applied to administrative proceedings.
Because administrative proceedings are civil in nature, the same
constitutional concerns are not present. Indeed
as the SEC has recognized, there is no constitutional requirement that
administrative agencies apply Brady . . . Nevertheless, some agencies have
incorporated the principles set forth in Brady into their procedural rules, See,
e.g., SEC Rule 230(b)(2). ..
does all this leave us? The Brady
Ruleis invoked in criminal proceedings to constrain government
prosecutors --- but we find this rule referenced within the procedural rules of
an SRO, a quasi-governmental or private entity.
Even within the context of the example Hearing Officer Perkins cites of
an agency that incorporates Brady into its procedural rules, the
referenced agency (the SEC) is an arm of a sovereign, i.e., a commission of the
United States Government.
I submit that the
incorporation of Brady into the NASD’s procedural rules underscores the
reality of the SROs’ true nature. SROs
are more governmental than private. Their
disciplinary proceedings are more criminal prosecutions than civil suits.
The results of SRO hearings are not the rendering of a civil award
imposing civil damages to be paid to the prevailing civil litigant. To the contrary, SROs impose “sanctions,” which are
generally suspensions from association and fines; and such sums of money that
are routinely collected do not go to benefit the alleged victims of securities
fraud (other than disgorgement) but normally wind up in the coffers of the SRO
itself --- again, more in keeping with criminal fines than civil damages.
protections afforded to the respondents trapped within this quasi system are
inadequate and unfair. Individuals
enmeshed in a quasi-governmental prosecution by the SROs are routinely barred
from their livelihoods because they assert a constitutional right.
That they may ultimately be guilty of underlying misconduct is besides
the point --- due process is not intended to be viewed as an inconvenience but
as a protection. Concededly, the SROs are not criminal prosecutors acting
pursuant to indictments, putting citizens in jail.
The NASD is not a sovereign government.
The NYSE is not empowered to issue grand jury indictments.
But that distinction may well be lost upon any citizen who happens to be
employed in the securities industry when ordered to appear at an SRO, subjected
to interrogation, forced to answer every question or be fined and/or barred for
failing to do so.
closing, I offer the following definition from Encyclopedia.com:
hybrid offspring of a male donkey (see ass)
and a female horse,
bred as a work animal. The name is also sometimes applied to the hinny, the
offspring of a male horse and female donkey; hinnies are considered inferior to
mules. . . They lack the speed of horses, but are more surefooted and have great
powers of endurance. Like donkeys, they are of a cautious and temperamental
disposition and require expert handling to perform well. Both sexes are sterile.
Engaging in a tremendous
amount of professional restraint, I will avoid the quick and easy jokes as to the parents
of the SROs (and I will particularly avoid any reference
to any parenthetical references). But
isn’t it interesting that the world of science doesn’t resort to the
inartful classification of these animals by calling them quasi-horses or
quasi-donkeys? Mules are neither
donkeys nor horses, they are mules. Now
if only we could so classify SROs and instill within them the better virtues of
Singeris the regulatory partner of
the securities industry law firm of Singer Frumento LLP in New York.
This article represents the personal views of Mr. Singer.
He may be reached at email@example.com.
© 2001 Bill Singer.
[i] Department of
Enforcement v. Mario J. Coniglione, Disciplinary Proceeding No.
C10000140 (May 14, 2001, Hearing Officer Gary A. Carleton) http://www.nasdr.com/pdf-text/oho_dec01_18.txt
; also see, Department of Enforcement v. Vincent P. Coniglione,
Disciplinary Proceeding No. C10000116 (May 2, 2001, Hearing Officer Andrew
H. Perkins) http://www.nasdr.com/pdf-text/oho_dec01_11.txt
[ii] ORDER DENYING
RESPONDENTS’ MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS AND FOR A LIST
OF WITHHELD DOCUMENTS, OHO Order 01-13 (CAF000045) (May 17, 2001, Hearing
Officer Andrew J. Perkins), http://www.nasdr.com/pdf-text/01_13oho.txt