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2004
CASE ANALYSIS

In the Matter of the Application of Toni Valentino for Review of Action Taken by NASD
Securities Exchange Act of 1934 Release No. 49255, February 13, 2004

http://sec.gov/litigation/opinions/34-49255.htm

 A Little Background

Toni Valentino, formerly associated as a general securities representative with Gruntal & Co., L.L.C. ("Gruntal"), an NASD member firm, appeals from NASD finding she violated NASD Procedural Rule 8210 by failing to appear for two on-the-record interviews (“OTRs”) requested by NASD staff. NASD barred Valentino and assessed costs.

NASD Procedural Rule 8210:
Provision of Information and Testimony and Inspection and Copying of Books

(a) Authority of Adjudicator and Association Staff

For the purpose of an investigation, complaint, examination, or proceeding authorized by the NASD By-Laws or the Rules of the Association, an Adjudicator or Association staff shall have the right to:

(1) require a member, person associated with a member, or person subject to the Association's jurisdiction to provide information orally, in writing, or electronically (if the requested information is, or is required to be, maintained in electronic form) and to testify at a location to be specified by Association staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and

(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding.

(b) Other SROs and Regulators

Association staff also may exercise the authority set forth in paragraph (a) for the purpose of an investigation, complaint, examination, or proceeding conducted by another domestic or foreign self-regulatory organization, association, securities or contract market, or regulator of such markets with which the Association has entered into an agreement providing for the exchange of information and other forms of material assistance solely for market surveillance, investigative, enforcement, or other regulatory purposes.

(c) Requirement to Comply

No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule.

(d) Notice

A notice under this Rule shall be deemed received by the member or person to whom it is directed by mailing or otherwise transmitting the notice to the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository. If the Adjudicator or Association staff responsible for mailing or otherwise transmitting the notice to the member or person has actual knowledge that the address in the Central Registration Depository is out of date or inaccurate, then a copy of the notice shall be mailed or otherwise transmitted to: (1) the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository, and (2) any other more current address of the member or the person known to the Adjudicator or Association staff who is responsible for mailing or otherwise transmitting the notice.

(e) Electronic Interface

In carrying out its responsibilities under this Rule, the Association may, as appropriate, establish programs for the submission of information to the Association on a regular basis through a direct or indirect electronic interface between the Association and members.

(f) Inspection and Copying

A witness, upon proper identification, may inspect the official transcript of the witness' own testimony. Upon written request, a person who has submitted documentary evidence or testimony in an Association investigation may procure a copy of the person's documentary evidence or the transcript of the person's testimony upon payment of the appropriate fees, except that prior to the issuance of a complaint arising from the investigation, the Association staff may for good cause deny such request.

 

In November 2000 NASD was investigating the private placement and trading of the securities of Pallet Management Systems, Inc. by D.L. Cromwell Investments, Inc., a member firm. NASD determined that, while Valentino was associated with Gruntal, one of her brokerage customers had purchased 185,000 units of Pallet from Cromwell in a private placement and later sold 160,800 of these units back to Cromwell. In addition, NASD determined that Valentino's husband, Lloyd Beirne, (the subject of an NASD investigation and a federal criminal grand jury investigation) served as president and partial owner of Cromwell. Pursuant to NASD Procedural Rule 8210, the Staff attempted to take Valentino's on-the-record testimony (OTR).  The history of the NASD’s efforts to schedule Valentino’s OTRs, her response thereto, and the attendant circumstances are set forth in the following table to:    

NASD Action

Valentino Action

Date Purpose Date Explanation
Letter of November 30, 2000 OTR for January 4, 2001 at Washington , DC   Herbert Jacobi, Esq. seeks delay for Valentino’s daughters ear surgery on January 3, 2001
Letter of December 13, 2000 OTR reschedule to January 24, 2001.    
    Jacobi fax of January 12, 2001 Surgery rescheduled for January 16. Seeks OTR in Florida on January 24, 2001, so that Valentino could remain near daughter.  In the alternative, OTR in Washington , DC "some time in the middle of February."
    Jacobi phone call of January 19, 2001 Surgery postponed until March.
Fax of January 19, 2001 OTR to occur January 24, 2001 in Washington , DC .    
    Jacobi fax of January 22, 2001 Valentino unwilling to travel while daughter being tested.
Fax Provide dates between January 25, and February 21, 2001   Jacobi agrees to February 20, 2001 in Florida
  NASD insists upon OTR in Washington , DC    
    Jacobi fax of February 12, 2001 "My client has concluded that her maternal obligations to her infant child far outweigh NASD Procedural Rule 8210(1)." Will only do the OTR on February 20th in Florida .
Fax of February 20, 2001 By February 23, provide five dates between March 12 and April 6 for Florida OTR.    
Letter of May 9, 2001 (no prior response from Valentino) June 28 OTR at its Florida office.    
    Jacobi fax of June 18, 2001 Jacobi has scheduling conflict for June 28.
Fax of July 6, 2001 By July 13, Jacobi must select at least three days for Washington OTR.    
    Russo Letter of July 17, 2001 Martin Russo, an attorney representing Valentino's husband, wrote to NASD to explain, among other things, that Jacobi had been named in a criminal complaint and therefore would not be able to continue to represent her. Russo stated that Valentino would contact NASD when she had retained new legal counsel. Russo also stated that Valentino would not be available for an interview during the first two weeks of August.

 

Letter of August 13, 2001 OTR August 28, 2001 in Washington    
    August 24, 2001 New lawyer Adam Mitzner informed NASD that he could not make the August 28 interview date, because he would be on vacation. He explained that he needed time to familiarize himself with Valentino's case and would contact NASD shortly after his return from vacation, September 6.

 

    Mitzner phone call of September 21, 2001 Mitnzer says Valentino not willing to fly to Washington because of her fears resulting from the terrorist attacks of September 11, 2001.
October 9, 2001 Provides five days in October for OTR in Washington . Since counsel did not respond, NASD scheduled October 25    
    Mitzner Fax of October 12, 2001 Valentino would not attend the October 25 interview because of her September 11 fears as well as the fact that "Ms. Valentino is the primary care giver to her two young children and it is very difficult for her to leave the Florida area where she lives."
Letter of October 18, 2001 OTR relocated to Florida on October 25, 2001    
    Mitzner telephone call of October 19, 2001/ confirmed by fax of October 22 Valentino would not appear for the October 25 interview in Florida because "the Second Circuit [Court of Appeals] is considering an appeal which has direct bearing on Ms. Valentino's decision whether to testify."  Seeks NASD adjourn the OTR until the Second Circuit ruled on that appeal.4
October 23, 2001 No adjournment    
    October 25, 2001 Valentino fails to appear in Florida for OTR
October 26, 2001 NASD served Valentino with a Notice of Intent to Suspend under NASD Procedural Rule 9541(b) for her refusal to attend two on-the-record interviews in violation of Procedural Rule 8210.  She was subsequently barred and costs of the proceeding assessed.    

 

How serious is a violation of NASD Rule 8210?

The NASD and SEC deem it critical that members and associated persons timely cooperate with investigations.  Failure to timely cooperate or to cooperate at all often carries severe penalties.  For example, NASD Sanction Guidelines with respect to NASD Procedural Rule 8210 violations provide that a bar should be the standard sanction when an individual fails to respond in any manner to requests for information.   Because the NASD does not have subpoena power, the SEC frequently reminds industry members that compliance with the SRO's rules requiring cooperation in investigations is essential to enable NASD to carry out its self-regulatory functions. Michael David Borth, 51 S.E.C. 178, 180 (1992). The SEC frequently notes that the NASD should not have to bring disciplinary proceedings, as it was required to do here, in order to obtain compliance with its rules governing its investigations.  Robert A. Quiel, 53 S.E.C. 165, 168 (1997)

What if there are mitigating factors?

Even where mitigation exists, the NASD Sanction Guidelines still allow for the imposition of a suspension in any or all capacities for up to two years.  

Given the explanations Valentino raised --- her daughter’s medical condition, September 11th, her husband’s criminal problems, her first lawyer’s indictment --- why didn’t the SEC reduce the bar?

The SEC frequently espouses the position that members and associated persons may not impose conditions, such as the location of an interview, under which they will respond to NASD requests for information.

·         Joseph Patrick Hannan, 53 S.E.C. 854, 859 (1998) (finding applicant could not impose conditions on NASD's requests for information and rejecting applicant's contention that he could not appear in "downtown Los Angeles" for a deposition because he had no accrued leave). 

·         Brian Prendergast, Securities Exchange Act Rel. No. 44632 (August 1, 2001), 75 SEC Docket 1525, 1541 (rejecting respondent's claim that he could refuse to testify in order to deprive potential litigants of the interview transcript);

·         Michael J. Markowski, Exchange Act Rel. No. 43259 (Sept. 7, 2000), 73 SEC Docket 625, 632, aff'd, 274 F.3d 525 (D.C. Cir. 2001), cert. denied, 537 U.S. 819 (2002) (stating that "[u]nwarranted delay erodes the NASD's ability to carry out its regulatory responsibilities");

·         Richard J. Rouse, 51 S.E.C. 581, 585-86 (1993) (finding that "members cannot be permitted to impose conditions on compliance with NASD information request”)

The NASD has a regrettable tendency to impose unfair conditions upon the conduct of Rule 8210 OTRs.  In recent years, NASD has engaged in what I view as inappropriate, heavy-handed efforts to force witnesses to travel at their own expense to remote locations for OTRs when there are closer NASD District Offices.  Moreover, NASD refuses to pay for such travel despite the fact that the SEC is obligated as a matter of law to offer reimbursement or advance the costs --- as is virtually every state and federal prosecutor and civil litigant.  In 2003 a group of NASD Dissidents promulgated a Statement of Principles seeking various reforms.  Among one of the issues raised was:

We call for the uniform codification of many investigation/examination practices by NASD staff that we find are arbitrary and capricious. 

·              Uniformity. Towards achieving that goal we would require a uniform form for the transmission of notices of investigations/examination.  Said forms should not vary from District to District and Examiner to Examiner, but should model themselves upon other standard notices, e.g., SEC Forms 1661 and 1662.  Said forms should include, at a minimum, a precise Fifth Amendment statement that NASD does not recognize this privilege, a warning as to the consequences of not appearing or refusing to cooperate, and a clear statement of the right to retain independent legal counsel. 

·              Bill of Rights.  We would promulgate an NASD Bill of Rights to be observed during investigations/examinations for member firms and their registered persons.  Among the practices we will seek to codify are acceptable protocols for scheduling and conducting on-the-record (OTR) interviews.  We will pointedly seek the creation of an impartial arbiter to resolve OTR disputes that arise between witnesses and staff.  Similarly, we will insist upon the codification of fair practices for requesting the physical appearance of a witness.  Notably we will seek to require that OTRs be held at

o             an NASD office within state where RR presently resides, or

o             is presently employed, or

o             where mutually acceptable.  

http://www.securitiesindustrycommentator.com/NDGMVote/NDGMPlatform.htm

Thankfully, NASD agreed to implement the "Uniformity" request and we are now seeing the use at some Districts of a standard notice accompanying many Rule 8210 demands.  Unfortunately, NASD has not addressed the complaints about forced travel and has not seen fit to issue a Notice to Members seeking comment on this issue.  

For a detailed examination of a case in which forced travel was an issue, visit http://www.securitiesindustrycommentator.com/2001/Q1/NASDOTR.htm.  

Also see an article in Registered Rep. magazine: http://registeredrep.com/ar/finance_no_free_ride/index.htm

Didn’t Valentino raise a fair excuse with her child’s health?

The SEC has held that family health concerns do not mitigate a failure to respond to NASD requests pursuant to Rule 8210 where the failure continues over a protracted period of time. See John A. Malach, 51 S.E.C. 618, 620 (1993) (finding unsubstantiated "personal problems" do not excuse respondent's failure to furnish information to NASD over the course of a two-year period).  Here, the SEC did not believe that the record indicated Valentino's daughter's condition was so serious that Valentino could not travel to Washington for a short period within a reasonable time frame.  Moreover, it appeared that NASD made every effort to accommodate Valentino by rescheduling the interview, offering a choice or a number of alternative dates, and even agreeing to dates her counsel recommended.   Clearly, the SEC seemed annoyed with the manner in which Valentino responded (or in some cases failed to respond) to the NASD --- particularly since her attorney often waited until the last minute to notify NASD that Valentino could not attend scheduled interviews.

But her attorney told her not to appear --- doesn't that give her a fair excuse for not attending the OTR?

The SEC frequently warns that reliance on counsel does not excuse an associated person's obligation to supply information or testimony or otherwise cooperate with NASD investigations. Joseph G. Chiulli, Exchange Act Rel. No. 42359 (Jan. 28, 2000), 71 SEC Docket 1544, 1553. See also Saundra Escott-Russell, Exchange Act Rel. No. 43363 (Sept. 19, 2000), 73 SEC Docket 1265, 1270 (finding that respondent "was not relieved of her obligation to respond to NASD's requests by her lawyer's advice").  A claim of reliance on counsel must be predicated on a showing that Valentino made complete disclosure to counsel, sought advice on the legality of her proposed conduct, received advice that her proposed conduct was legal, and relied in good faith on counsel's advice. SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n. 28 (D.C. Cir. 1981). Here, the SEC emphasized that Valentino was personally notified by NASD that her failure to appear at the OTRs could result in a bar and she admitted that she weighed that consideration when deciding whether to testify. As such, she could not have relied in good faith upon any assurance from her lawyer that her failure to testify wouldn’t have severe consequences. Frankly, the SEC seemed quite persuaded by the facts that Valentino was so much relying upon advice of counsel as engaging in a scheme to delay her testimony for nearly eleven months. Jonathan Garrett Ornstein, 51 S.E.C. 135, 140 (1992) (finding applicant's dilatory tactics in failing to respond to written information requests, refusing and not claiming certified mail, and failing to timely notify NASD of his new mailing address, violated NASD rules).  

The Verdict

The SEC sustained the NASD's findings of violations of NASD Procedural Rule 8210 and the sanctions of a bar with costs.


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