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The NASD 2004 Decision found that Avello was not liable for the HKS net capital violation on June 28, 1996. Accordingly, NASD reversed its previous finding that Avello was responsible for the Firm's operating on June 28, 1996 below its minimum net capital requirement. In reconsidering the sanctions it had imposed, the NASD 2004 Decision determined that, in light of the dismissal of the net capital violation, the $5,000 fine and $665.80 in costs it had imposed in the NASD 2000 Decision were no longer appropriate. 

But. . .

However, the NASD 2004 Decision determined it was necessary to impose some sanction for the violations for which Avello was responsible, because Avello 

• was responsible for books and records and reporting violations that occurred over nineteen months;
• had continued to file FOCUS reports even though he knew that he was not receiving accurate financial information from the Firm's accountant in 1997; and
• as the FINOP for HKS, was responsible for keeping accurate books and records and for filing accurate FOCUS reports. 

The NASD 2004 Decision determined that a letter of caution was an appropriate sanction and stated that the NASD 2004 Decision would serve as the letter of caution.  Avello appealled the NASD 2004 Decision to the SEC.

The SEC determined that Avello continued to file FOCUS reports even though he knew the information he received from the Firm's accountant was not accurate. Accordingly, the SEC found that the NASD 2004 Decision appropriately balanced the need to sanction a FINOP for engaging in specific books and records and reporting violations under these circumstances with the fact that, more generally speaking, Avello made good faith efforts to report accurately, to keep HKS in net capital compliance, and to keep the Firm from doing business when its net capital computation was in question. 

Accordingly, the SEC found that the imposition of a letter of caution as the sole sanction for Avello's violations is neither excessive nor oppressive.

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1. November 6, 2000 ("NASD 2000 Decision"): NASD found that Avello 

• violated Exchange Act Rule 17a-3 and NASD Conduct Rule 3110 by failing to maintain accurate financial records and making inaccurate reports to NASD;

• filed six inaccurate quarterly FOCUS II reports for HKS between 1995-1997; and

• was liable for HKS' Net Capital violation of June 28, 1996

In considering the appropriate sanction for Avello's violations, the NASD considered favorably Avello's diligence in reporting numerous recordkeeping and accounting errors to NASD staff and his efforts to improve the Firm's regulatory compliance. The NASD fined Avello $5,000 and assessed $665.80 in costs.

Oddly, the NASD 2000 Decision held Avello liable for the HKS net capital violation even though the deficiency calculation included a $47,000 liability which the NASD 2000 Decision expressly absolved Avello of responsibility for recording;

2. Avello appealed the NASD 2000 Decision to the SEC;

3. November 7, 2002 ("SEC 2002 Decision") Nicholas T. Avello, Securities Exchange Act Rel. No. 46780 (Nov. 7, 2002), 78 SEC Docket 2859.: Sustained NASD's findings that Avello was liable for HKS's net capital violation on June 28, 1996 and also for various violations of recordkeeping and reporting rules. 

4. Avello appeals the NASD 2000 Decision and the SEC 2002 Decision to the United States Court of Appeals for the Seventh Circuit

5. Briefing at the 7th Circuit identified an issue regarding the calculation of HKS's net capital position on June 28, 1996, the sole date for which Avello had been held liable for a net capital violation. 

6. On August 20, 2003, the Seventh Circuit granted SEC's request for the remand of the entire case to its jurisdiction. 

7. December 3, 2003 ("SEC Remand Order"), the SEC issued a partial remand to NASD for the limited purposes of clarifying Avello's liability for any HKS net capital violation on June 28, 1996 and modifying the sanctions initially imposed on Avello if warranted by such clarification

8. August 11, 2004 ("NASD 2004 Decision"): 

• Vacated NASD 2000 Decision that Avello was liable for a net capital violation by HKS on June 28, 1996;

• vacated the $5,000 fine and $665.80 in costs it had imposed in the NASD 2000 Decision; and 

• determined that the NASD 2004 Decision should serve as a letter of caution with respect to the findings of recordkeeping and reporting violations in the NASD 2000 Decision.