NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

SECURITIES INDUSTRY COMMENTATOR™
2005
CASE ANALYSIS

By Bill Singer

In the Matter of the Application of Paul K. Grassi, Jr.
For Review of Disciplinary Action Taken by the New York Stock Exchange, Inc.  

Securities Exchange Act of 1934 Release No. 52858, 
November 30, 2005
http://sec.gov/litigation/opinions/34-52858.pdf

 
Paul K. Grassi. Jr., a registered representative and NYSE member, was employed by CIBC World Markets (CIBC) as a floor broker from February 1998 until July 2002. On May 1, 2002, Grassi, who suffered from chronic back pain, was examined by a doctor at Comprehensive Health Services, Inc. ("CHS"), which operates a health clinic at the NYSE for members, their employees, and NYSE employees. During the May visit, a doctor wrote Grassi a prescription for Vicodin. Grassi testified that when he went to fill the prescription, he discovered that a blank prescription form was attached to the form that had been filled out by the doctor. 

On June 10, Grassi returned to CHS complaining of back pain and a different doctor wrote Grassi another prescription for Vicodin. The doctor instructed Grassi to see his own physician and noted on Grassi's chart that no additional prescriptions for Vicodin would be written. 

On the evening of June 12, Grassi requested that an acquaintance complete the blank form (which Grassi had obtained during the May visit) by writing a prescription for Vicodin and signing a CHS doctor's name to the form. Grassi paid the acquaintance approximately $20 to complete the form and forge the doctor's name. The next day, Grassi attempted to fill the prescription at a pharmacy located near the Exchange. The pharmacist noticed that the signature was not that of the doctor in question and called CHS to inquire about the legitimacy of the prescription. CHS informed the pharmacist that the CHS doctor did not write the prescription. 

Arrest and Subsequent Dismissal of Criminal Charges

Grassi was subsequently arrested and criminal charges brought by the New York County District Attorney's office. The case against Grassi was adjourned in contemplation of dismissal, a procedure whereby a case is adjourned but remains open for six months in order for the court to monitor the defendant's behavior. It appears from the record that the case against Grassi was dismissed six months after the court adjourned the matter. 

December 2003 NYSE Hearing Panel Findings:

On December 3, 2003, a NYSE Hearing Panel unanimously found that Grassi had engaged in acts detrimental to the interest or welfare of the NYSE when he obtained the prescription form, caused it to be completed and signed, and presented the form to a pharmacy for the purpose of obtaining the unauthorized prescription. The Hearing Panel found that the NYSE's Division of Enforcement had not established that Grassi's actions constituted conduct inconsistent with just and equitable principles of trade or that he had failed to comply timely with the investigation. The Hearing Panel imposed a:

  • Censure;
  • 5 year bar from membership, allied membership, approved person status, and from employment or association in any capacity with any member or member organization; and 
  • An additional 5 year bar from NYSE membership

June 2004 NYSE Board (appeal) Findings:

Grassi filed an appeal to the NYSE's Board of Directors (the "Board"), and in a decision dated June 28, 2004, the Board affirmed the Hearing Panel's findings with respect to guilt, but remanded the matter to the Hearing Panel to provide a detailed explanation of the factors it considered in its sanctions determination

July 2004 NYSE Hearing Panel  Supplemental Decision:

On July 12, 2004, the Hearing Panel issued a supplemental decision in which it detailed the reasons supporting its sanctions determination. 

December 2004 NYSE Board (appeal) Findings:

On December 2, 2004, the Board again affirmed the Hearing Panel's finding of guilt, but it modified the sanctions imposed by the Hearing Panel so that the five-year bar from membership would run concurrently with the five year plenary bar.

For details concerning the above NYSE history, visit In the Matter of Paul K. Grassi, Jr. (NYSE 03-217) http://www.nyse.com/pdfs/03-217A.pdf

Grassi appealed to the SEC the NYSE's findings and sanctions.

NYSE Rule 476. 
Disciplinary Proceedings Involving Charges Against Members, Member Organizations, Allied Members, Approved Persons, Employees, or Others 

(a) If a member, member organization, allied member, approved person, or registered or non-registered employee of a member or member organization or person otherwise subject to the jurisdiction of the Exchange is adjudged guilty in a proceeding under this Rule of any of the following offenses —

(1) violating any provision of the Securities Exchange Act of 1934 or any rule or regulation thereunder;

(2) violating any of his or its agreements with the Exchange;

(3) violating any provision of the Constitution or any Rule adopted by the Board of Directors of the Exchange;

(4) making a material misstatement to the Exchange;

(5) fraud or fraudulent acts;

(6) conduct or proceeding inconsistent with just and equitable principles of trade;

(7) acts detrimental to the interest or welfare of the Exchange;

(8) making a fictitious bid, offer or transaction or giving an order for the purchase or sale of securities the execution of which would involve no change of beneficial ownership or executing such an order with knowledge of its character;

(9) making any purchases or sales or offers of purchase or sale of securities for the purpose of upsetting the equilibrium of the market or bringing about a condition in which prices will not fairly reflect market values, or assisting in making any such purchases or sales with knowledge of such purpose, or being, with such knowledge, a party to or assisting in carrying out any plan or scheme for the making of such purchases or sales or offers of purchase or sale;

(10) having made a misstatement or omission of fact on his or its application for membership or approval, or on any financial statement, report, or other submission filed with the Exchange; or

(11) refusing or failing to comply with a request of the Exchange to submit his or its books and records . . .; or

if a member who is registered as a specialist is adjudged guilty in a proceeding under this Rule of substantial or continued failure to engage in a course of dealings for his own account to assist in the maintenance, so far as practicable, of a fair and orderly market in any security in which he is registered;

then, in any such event, the Hearing Panel shall, in accordance with the procedures set forth in this Rule, impose one or more of the following disciplinary sanctions . . .: expulsion; suspension; limitation as to activities, functions, and operations, including the suspension or cancellation of a registration in, or assignment of, one or more stocks; fine; censure; suspension or bar from being associated with any member or member organization; or any other fitting sanction . . . 

SEC Considers the Appeal

On appeal to the SEC, Grassi argued that the violation with which he is charged 

  • did not occur in connection with his employment at a NYSE member firm;

  • was unrelated to the business of the NYSE;

  • did not relate to any of his duties or responsibilities on the floor of the NYSE; and 

  • did not impact any customer, employee, or member of the NYSE.

Isn't the NYSE's disciplinary authority limited to securities-related business?

The SEC will not limit the NYSE's disciplinary authority to misconduct committed by a member in the course of its securities-related business. 

When reviewing allegations that conduct is inconsistent with just and equitable principles of trade, the SEC has held repeatedly that a self-regulatory organization's disciplinary authority is broad enough to encompass conduct that does not involve a security if that conduct reflects on a person's ability to comply with the regulatory requirements of the securities industry and to fulfill his fiduciary duties. Similarly, the SEC finds that authority applies to acts detrimental to the interests or welfare of the NYSE because the securities business depends heavily on the integrity of its participants. 

Accordingly, the SEC found that Grassi's actions in paying someone to forge a prescription slip and then using that prescription to attempt to obtain medication illegally calls into serious question his ability to comply with the fundamental requirements of candor and truthful representation required of persons employed in the securities industry.

HOW FAR WILL THE SEC STRETCH?

Vincent Musso, 48 S.E.C. 1, 5 (1984)

Permits disciplinary authority to extend to any member conduct that is not inconsistent with a specific standard.

Jeffrey Michael Miller, 51 S.E.C. 1027, 1028-29 (1994):

Sustaining NYSE disciplinary action for, among other things, providing a falsified letter to make it appear that the Exchange would pay a settlement in an unrelated matter

William Rembert, 51 S.E.C. 825, 826 n.3 (1993):

holding in an appeal of NASD disciplinary action that Section 15A(b)(6) of the Exchange Act empowers self-regulatory organizations to discipline their members for unethical behavior, as well as violations of law.

Daniel D. Manoff, Securities Exchange Act Rel. No. 46708 (Oct. 23, 2002), 78 SEC Docket 2359, 2364; and James A. Goetz, 53 S.E.C. 472, 477 (1998):

addressing NASD's rule requiring associated person to observe high standards of commercial honor and just and equitable principles of trade

Ivan M. Kobey, 51 S.E.C. 204, 207 (1992)

holding that the NYSE had jurisdiction to determine whether the conduct of an employee of a member firm was fraudulent or inconsistent with just and equitable principles of trade even though the instruments involved in the transactions were commodities and limited partnerships and not securities

DWS Securities Corp.. 51 S.E.C. 814, 822 (1993):

holding that NASD's disciplinary authority is broad enough to encompass business-related conduct that is inconsistent with just and equitable principles of trade, even if that activity does not involve a security.

But if Grassi had an addiction to Vicodin, wouldn't that have clouded his mental state and possibly prevented him from fully appreciating his conduct?

Grassi attempted to demonstrate that 

  • he had a Vicodin dependency; 
  • the treating physician did not take appropriate steps to treat that addiction; and
  • his Vicodin addiction prevented him from forming the state of mind (scienter) necessary to truly know what he was doing. 

In fairly dismissive terms, the SEC states that Grassi failed to establish how the inadequacy of his medical treatment by doctors at CHS is material to the charges against him. The SEC states that a finding of bad faith or unethical conduct is sufficient for sustaining a violation of an ethical rule such as Rule 476(a). Although the Hearing Panel permitted Grassi's expert witness to testify with respect to the effects of Vicodin and the possible state of mind of an individual addicted to Vicodin, the SEC did not discern any exculpatory evidence with respect to his state of mind at the time of the events in questions. Moreover, Grassi testified that his conduct was "very inappropriate" and that he "knew it was wrong." In other words, he knew that by submitting the forged prescription he was acting unethically and in bad faith. This is all that is required to establish his violation of Rule 476(a)(7). 

What about the allegation on appeal to the SEC that members of the Hearing Panel had previously used the same CHS doctor whose treatment was being challenged?  Doesn't that raise some conflicts?

Although the NYSE Hearing Officer disclosed, on the record, that he and the members of the Hearing Panel previously had been treated by the CHS doctor, Grassi never raised his claim of bias before the NYSE Panel. In any event, the SEC did not find that Grassi articulated the nature of any alleged bias. The CHS doctor testified that the signature that appeared on the prescription form in question was not his signature and that he did not knowingly provide a blank prescription form to Grassi. 

Calvin David Fox, Exchange Act Rel. No. 48731 (Oct. 31, 2003), 81 SEC Docket 2017, 2020-21 

holding that with respect to conduct alleged to be inconsistent with just and equitable principles of trade in violation of Rule 476(a)(6), the NYSE need not establish that respondent acted with scienter, but must find that the respondent acted in bad faith or unethically

Robert E. Kauffman, 51 S.E.C. 838, 839-40 (1993); aff'd, 40 F.3d 1240 (3rd Cir. 1994)

holding that a violation of NASD's rule prohibiting conduct inconsistent with just and equitable principles of trade does not require a finding that respondent acted with scienter, but requires a finding of bad faith or unethical conduct 

Stephen Russell Boadt, 51 S.E.C. 683, 685 (1993) 

holding in an appeal from NASD disciplinary action that an applicant must object to the composition of a hearing panel at a time when the alleged defect could have been remedied

Appropriate Sanctions?

Once a Self-Regulatory Organization finds a violation, can the fairness of the sanctions they impose be challenged with any success?

That's a very important question and one that all respondents should ask their lawyers.  Even if you've been found guilty of a violation by an SRO, that doesn't mean that they can just impose any sanction they choose.  The appropriate sanction depends on the facts and circumstances of each particular case. 

How did the NYSE select the sanctions in the case against Grassi?

The NYSE examined a number of their prior cases involving a finding of conduct inconsistent with just and equitable principles of trade, and then attempted to extrapolate the sanctions imposed in those cases to Grassi.

Why isn't that fair?

Although the NYSE charged Grassi with conduct inconsistent with just and equitable principles of trade, the Panel and Board specifically ruled that the burden of proof for that charge was not met.  He was found to have engaged in conduct detrimental to the interest or welfare of the NYSE. Think of it this way.  You're charged with murder and assault, and after a trial, the jury finds you not guilty of murder but guilty of assault.  How would you feel if the judge imposed a life sentence based upon reviewing the sentences historically imposed in murder cases?  

Further, the "just and equitable" cases cited by the NYSE in support of the sanctions it imposed on Grassi involved abuse of expense accounts or use of funds mistakenly deposited into an account Clearly, that line of cases implicate the member's ability to handle other people's money more directly than prescription forgery involving Grassi. 

What remedy did the SEC propose to rectify the uncertainty?

On remand, the parties should more fully develop whether, under the circumstances of this case, the concurrent five-year bars are consistent with the purposes of the Exchange Act. 

SEC Decision

Sustained NYSE's findings of violations but remanded for reconsideration of the sanctions imposed.

IN A NUTSHELL

I don't want to go too overboard here in my criticism of the sanctions in the case.  Without question, the conduct at issue is troubling --- not just for the criminal allegations but also because of the dangers of self-medicating and using powerful prescriptions without a doctor's consultation. To be fair to the NYSE, this is likely a case of first impression and there may well have been no prior precedence to reference.  I mean how many NYSE floor brokers have been arrested for forging a doctor's signature on a prescription form?  If the NYSE is guilty of anything, it may simply be that it failed to adequately explain why it imposed the sanctions it did upon Grassi.  Hopefully, that will be remedied by the SEC's remand for reconsideration.

Still, the issues and ramifications of this case are very troubling, if not frightening.

Grassi's criminal case was adjourned and dismissed.

Let me state that once more, for effect.  His criminal case was adjourned and dismissed.

Isn't the NYSE essentially re-trying him for the very same underlying conduct that a criminal court considered?  Moreover, Grassi's conduct appears to have been an isolated incident that did not relate to any of his duties or responsibilities on the NYSE floor and did not directly impact any customer, employee, or member of the Exchange. How does such conduct harm the integrity and reputation of the NYSE?  What about folks who smoke in no-smoking zones?  What about folks who drink too much at a party?  It's not so much a question of where it ends, as it is a question of where does it begin?  That's the issue I think Grassi is credibly raising.

Do individuals employed on Wall Street have any privacy rights --- to put it more bluntly, do they have a life outside of work?  Look at the wall of restrictions that has been built one unassuming brick at a time. You can't post comments on the Internet.  You can't send or receive "personal" emails.  You need to have pre-approval of radio/television appearances. Personal indiscretions that do not appear job-related have regulatory consequences.  Is Wall Street nothing more than a police state?

And if we're going to bar Grassi for 5 years for what may well be a disability --- an addiction to Vicodin --- then what other areas should the NYSE be investigating?  What is the going rate for a first-time driving under the influence?  What is the going rate for sexual discrimination or harassment?  What is the going rate for racial discrimination or harassment?  What is the going rate for misuse of a Form U5 to interfere with a departing broker's ability to compete?  Why don't we see regulatory action against those acts that would also seem to harm the NYSE's credibility and welfare?  

Interesting when it comes to the politics of SRO enforcement.  No?

 

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