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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.
STATUTORY
DISQUALIFICATION APPLICATION
2006
By
Bill Singer
In
the Matter of the Association of X as a General Securities Representative
with The Sponsoring Firm
Redacted Decision Notice Pursuant to Section 19(d) Securities Exchange Act
of 1934 Decision No. SD06012
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| In the Matter
of the Association of X as a General Securities Representative
with The Sponsoring Firm Redacted Decision Notice Pursuant to
Section 19(d) Securities Exchange Act of 1934 Decision No. SD06012 |
DENIED
by National Adjudicatory Council
In April 2006, a subcommittee (“Hearing Panel”) of NASD’s
Statutory Disqualification Committee held a hearing on the matter
and recommended the denial of the application
On November 14, 2005, the Sponsoring Firm1 (“the Firm”)
submitted a Membership Continuance Application (“MC-400” or
“the Application”) with NASD’s Department of Registration
and Disclosure (“Registration and Disclosure”), seeking to
permit X, a person subject to a statutory disqualification, to “continue
to associate” with the Firm as a general securities
representative. X appeared at the hearing accompanied by her
counsel and her Proposed Supervisor. |
| SD
Event |
X is statutorily
disqualified because she pled
guilty in April 2005, to driving while intoxicated (“DWI”), a
felony in State1. X’s 2005 conviction is a felony because
she had two prior DWI misdemeanor convictions in State1. The
first, in June 1997, resulted in a $750 fine. The second, in
January 1999, resulted in a $500 fine, a six-month revocation of
her driver’s license, and a three-year probation. X successfully
completed her probation for the 1999 misdemeanor DWI conviction
and regained her driver’s license.
In September 2005, a State 1 court sentenced X to five
years’ probation, revoked her driver’s license for one year,
and fined her $2,000. On that same date, the State1 judge granted
X a Certificate of Relief from Disabilities, which the SEC had
held restores certain rights and responsibilities of citizenship,
but does not remove a person from statutory disqualification. X’s
counsel acknowledged at the hearing that X’s certificate does
not excuse her statutory disqualification and that X must fully
disclose the felony charge and conviction.
|
| Sentence
Expiration |
X’s probation is due to
expire in September 2010 |
| Prior
Industry Activity |
X first registered in the
securities industry as a general securities representative (Series
7) in October 1983. She also passed the uniform securities agent
state law examination (Series 63) in October 1983.
X was previously employed by Firm1 from October 1983 until
November 1997, and Firm2 from November 1997 until April 2005.
Firm2 discharged X in April 2005, stating on the Uniform
Termination Notice for Securities Registration (“Form U5”)
that she “violated firm policy by accepting from a customer oral
discretion to place certain trades in his account.” X stated
that she did not exercise oral discretion, and maintained that
Firm2 had terminated her because it wanted to eliminate her and
save money by distributing her clients and income between the
remaining two members of her partnership “team.”
|
| Background |
In January 2006, Firm2
submitted to NASD an amended Form U5 that stated that the New York
Stock Exchange (“NYSE”) had begun an investigation of alleged
unauthorized activity by X in two customers’ accounts when she
was employed at Firm2. Because this investigation remains pending,
Member Regulation was not able to obtain any further information
on this allegation. Following the hearing, in response to the
Hearing Panel’s request for information on this issue, X
provided copies of: 1) a letter X wrote to the NYSE dated July
2005; 2) a letter from the NYSE to X dated January 2006; and 3) a
letter dated January 2006 to the NYSE from X. These letters
indicate that in May 2005, the NYSE informed X that it was
conducting an investigation following Firm2's April 2005
termination of her employment and requested a statement from X
regarding alleged unauthorized activity in the account of Customer
One. X responded to the NYSE’s request in July 2005, denying
that she had effected any transactions in Customer
One’s account without prior approval. Thereafter, the NYSE
notified X by letter dated January 2006, that it had begun an
investigation into allegations of unauthorized activity by X in
the accounts of Customers One and Two. The NYSE stated that
"[t]he investigation is not a reportable event at this
time." X responded in a letter dated January 2006, that she
had nothing further to add to her July 2005 statement regarding
Customer One, and that she had not effected any trades on behalf
of Customer Two without "verbal authorization over the phone
or in the office."
NASD’s Central Registration Depository ("CRD" ®)
reflects that four customer complaints have been filed against
X.
-
1996: alleged that X made two unauthorized
sales of stock and engaged in churning while she was
associated with Firm1. In May 1997, Firm1 settled the
complaint for $2,042.
X did not contribute individually to the settlement.
-
October 1998: alleged that X engaged in misrepresentations
while she was associated with Firm1. In November
1998, Firm1 settled the complaint for $3,000.
X did not contribute individually to the settlement.
-
December 2000: alleged that X made unsuitable
recommendations when she was associated with Firm2.
In January 2001, Firm2 and X denied this complaint, and
there is no record of any further action taken by the
customer.
- March 2001: alleged that X made unsuitable
recommendations and failed
to follow client instructions while she was with
Firm2. This complaint went to NASD arbitration, and the
claimant sought compensatory damages of $200,000. CRD
indicates that records related to this matter were
"lost on September 11, 2001." In April 2002, the arbitration
panel awarded the claimant compensatory damages of $175,000.
X did not contribute individually to the award.
X became associated as a general securities representative
with the Sponsoring Firm in May 2005. During its initial
consideration of this Application in early 2006, Member
Regulation discovered that X had failed
to disclose her April 2005 guilty plea and felony conviction when
she filed her initial Uniform Application for Securities
Industry Registration or Transfer (“Form U4”) with the
Sponsoring Firm in May 2005. X contested Member Regulation’s
assertion.
X maintained that, in May 2005, she answered
"Yes" to question 14A(1)(b) on the Form U4 as
to whether she had been "charged"
with a felony, but answered
"No" to question 14A(1)(a) as to whether she
had been "convicted"
of a felony. In an affidavit dated March 2006, X stated that she
believed at that time that the 2005 felony DWI charge became
final and a "conviction" only when she was sentenced
in September 2005.
Member Regulation consulted with NASD’s Department of
Registration and Disclosure on this issue, and, in March 2006,
Member Regulation advised the Firm that NASD was withdrawing its
earlier approval of X’s registration due to her failure to
disclose her April 2005 guilty plea on the May 2005 Form U4
submitted to the Sponsoring Firm. The Firm terminated X in March
2006, and filed a Form U5 in March 2006.
|
| Sponsoring
Firm |
NASD member since 1992.
Full service BD. 1 OSJ in State1 (home office) and 1
branch. Employs 10 registered principals, and 35 RRs.
NASD has begun, but has not yet completed, its
2004 and 2006 routine examinations of the Firm. NASD issued the
Firm Letters of Caution
("LOCs") for the 2000 and 2002 routine
examinations.
-
In the 2000 LOC, NASD cited the Firm for books
and records violations, one continuing education violation,
and failure to fully report certain state and court actions
against one former registered representative. The Firm
responded by letter dated January 2001, stating the measures
that it had taken to correct the cited problems.
- In the 2002 LOC, NASD cited the Firm for failing to
establish a system to monitor and prevent outbound
solicitation calls; failing to address certain business
practices in its written supervisory procedures; failing to
maintain a readily available and centralized "Do-Not-Call
List;" failing to accurately compute net capital for the
period ending June 2002; and filing an inaccurate FOCUS report
due to the incorrect June 2002 net capital computation. The
Firm responded by letter dated March 2003, stating the
measures that it had taken to correct the deficiencies noted
by NASD.
|
| Proposed
Activity |
General
Securities Representative in its home office in State1. The
Sponsoring Firm will compensate X by a percentage of commissions
and sales charges. |
| Proposed
Supervisor |
The Proposed Supervisor was previously associated
with FirmA from February 1988 until April 1990 and FirmB from
April 1990 until August 1996.The Proposed Supervisor has been
associated with the Sponsoring Firm since August 1996 and is the
branch manager at the Firm’s home office, where he supervises 11
registered representatives at that location. He has been employed
in the securities industry as a general securities representative
(Series 7) since February 1988. He qualified as a uniform
securities agent (Series 63) in March 1988, and a general
securities principal (Series 24) in February 1998. 8
The Proposed Supervisor has been the subject of
six customer complaints.
-
October 1990: for an unauthorized
transaction and withdrew
it shortly thereafter with no action having been taken.
-
April 1993: engaged in unauthorized,
unsuitable, and excessive trading. The alleged
compensatory damages were $75,000. Firm B settled the
complaint in December 1994 for $12,000.
The Proposed Supervisor did not contribute individually to
the settlement.
-
November 1993: alleging misrepresentation,
unsuitable transactions, and unauthorized trades. The
alleged compensatory damages were $150,000. Firm B settled
the complaint in July 1994 for $57,000.
The Proposed Supervisor did not contribute individually to
the settlement.
-
November 1994: alleging unsuitable
transactions and churning. The alleged compensatory
damages were $40,000. Firm B settled the complaint for $4,000
in May 1995. In addition, CRD indicates that the Proposed
Supervisor settled with the customer for $15,000. At
the hearing, the Proposed Supervisor testified that the CRD
information regarding his contribution is incorrect and that
he had not contributed to this settlement.
-
January 1995: alleging unauthorized
transactions, churning, unsuitable transactions, and
failure to follow customer directions. The customer
requested $110,000 in compensatory damages. Firm B settled
the complaint for $15,000
in July 1995, and the Proposed Supervisor
was dismissed from the case with no liability.
- August 1997: alleging unauthorized
trading, churning, excessive margin, and over-concentration,
and requesting $150,000 in compensatory damages. Firm B
settled the complaint for $20,000
in September 1998, at which time the Proposed Supervisor
was dismissed from the case.
At the hearing, the Proposed Supervisor testified that the
six complaints stemmed from his employment with Firm B.
According to the Proposed Supervisor, during the 1990s, Firm B
was engaged in massive
litigation regarding sales of limited partnerships. The
Proposed Supervisor stated that Firm B’s media exposure from
the settlement of such suits led other customers to file
complaints against Firm B representatives for various alleged
infractions. The Proposed Supervisor denied culpability as to
each customer complaint.
|
| Member
Regulation Recommendation |
Denial |
| Considerations |
- X’s felony conviction
is recent, and she will remain
on probation until 2010;
- she failed
to disclose her 2005 felony conviction to the Firm;
- she was dismissed from Firm2 in April 2005
for violating firm policy.
Member
Regulation noted the Firm’s lack of formal disciplinary history
and the Proposed Supervisor’s history of old customer
complaints. However, concerns with X’s background outweighed the
Firm’s relatively clean record and the Proposed Supervisor’s
history of old customer complaints.
X was convicted of a recent, serious criminal
offense. Moreover, she is a repeat
offender, having had three DWI convictions between June
1997 and April 2005. X will remain on probation for her 2005
felony DWI conviction until September 2010. The NAC acknowledged
that X testified that she has been involved with Alcoholics
Anonymous and has undergone counseling since her last DWI arrest,
and that she has thus far complied
with the terms of her probation. Nonetheless, the NAC noted
that X has recognized and treated her
chronic alcohol problem only during the last year, and shared
Member Regulation’s concern that sufficient time has not yet
elapsed for X to demonstrate that the change in her behavior
pattern is fundamental and long lasting and that she can
conduct herself in a responsible and compliant fashion in the
securities industry.
The concern with X’s pattern of criminal
convictions was buttressed by other evidence in the record
suggesting that she may be unable to conform her behavior to
applicable laws and regulations. Firm2 terminated X in April 2005,
stating on the Form U5 that she "violated firm policy by
accepting from a customer oral discretion to place certain trades
in his account." This matter is currently being investigated
by the NYSE. Additionally, four customers filed complaints against
X between 1996 and 2001, and three of those complaints
resulted in monetary awards to the claimants. Although
certain of these matters have not been adjudicated, they raised
questions as to whether there have been recent instances when X
may have failed to act in the best interest of her customers.
X was convicted of a felony DWI in 2005 that
resulted in her being statutorily disqualified.
The question is when that conviction
occurred. Member Regulation asserts that X was convicted of
the felony DWI when she entered a guilty plea to the felony charge
in April 2005, and therefore she improperly completed the Form U4
with the Sponsoring Firm in May 2005. X
argues that when she submitted her Form U4 to the Sponsoring Firm
in May 2005, she did not believe that her guilty plea was
"final" and did not understand that she was
"convicted" until she was sentenced for the felony in
September 2005, at which time she informed the Sponsoring Firm and
the Firm amended her Form U4. Of note to the NAC was the fact that
the Certificate of Disposition issued in
October 2005, by the State1 court that processed X’s felony
criminal matter, stating that "[in April 2005], [X] was
convicted of . . . a class ‘D’ Felony . . . in satisfaction of
this Superior Court Information." The
NAC found that X was convicted of the
felony charge in April 2005.
Additionally, the NAC found that X failed to make adequate
disclosure of her December 2004 arrest and charge of felony DWI. X
argues that because she was unaware at the time that the guilty
plea was considered to be a conviction, she therefore answered
"yes" to question 14A(1)(b) on the Form U4 as to whether
she had been "charged" with a felony, but answered
"no" to question 14A(1)(a) as to whether she had been
"convicted" of a felony. On the criminal disclosure
reporting page ("DRP") accompanying the May 2005 Form
U4, however, X made no mention of the December 2004 felony DWI
arrest. Instead, she described only a previous 1997 felony DWI
charge that resulted in a conviction for a misdemeanor.
Finally, the NAC noted that the Proposed
Supervisor had been the subject of several customer complaints relating to his
trade practices. Although conceding that the complaints were not recent, The NAC
was troubled by the Proposed Supervisor’s
discussion of those complaints at the hearing because he tended to minimize the complaints, blame Firm B, and avoid accepting
responsibility for any of the problems. Supervision of a statutorily
disqualified person requires heightened procedures and extra dedication on the
part of a manager. We are not convinced that the Proposed Supervisor could effectively supervise X and continue to represent his many
clients and supervise numerous other representatives.
|
| Citations |
The Commission
has held that a Certificate
of Relief is a “factor to be considered” in
a statutory disqualification proceeding. Jonathan Scott Saluk,
Exchange Act Rel. No. 35623, 1995 SEC LEXIS 923, at *2 (Apr. 19,
1995).
See Frank Kufrovich, Exchange Act
Rel. No. 45437, 2002 SEC LEXIS 357, at *16 (Feb. 13, 2002)
(upholding NASD’s denial of a statutory disqualification
applicant who had committed non-securities related felonies
"based upon the totality of the circumstances" and NASD’s
explanation of the bases for its conclusion that the applicant
would present an unreasonable risk of harm to the market or
investors).
The term
"convicted" is not defined in either the
Securities Exchange Act of 1934 ("the Exchange Act") or
NASD’s By-Laws. The Commission has advised NASD to look first to
federal securities laws for guidance on this issue and instructed
NASD to turn to Section 2(a)(10) of the Investment Company Act of
1940 and Section 202(a)(6) of the Investment Advisers Act of 1940,
which define "convicted" to include: "a verdict,
judgment or plea of guilty, or a finding of guilt on a plea of
nolo contendere, if such verdict, judgment, plea or finding has
not been reversed, set aside, or withdrawn, whether or not
sentence has been imposed." Interpretative
letter dated February 21, 1992, from Joseph M. Furey, Assistant
Director, Division of Market Regulation, SEC, to Bruno Lederer,
Associate General Counsel, NYSE. Commission staff have concluded
that "[w]hen a court accepts a plea of guilty . . . [the]
conviction remains in effect until reversed, set aside or
withdrawn irrespective of whether a sentence has been
imposed."
The Commission has also stated that a state’s interpretation
of its laws may provide guidance concerning the question of when a
defendant has been convicted of a felony. The parties agree that
in December 2004, X was arrested and charged with felony DWI. The
record also shows that in April 2005, X entered a guilty plea to
the felony DWI. State 1
Consolidated Law Service, Criminal Procedure Law, section 1.20(13)
defines "conviction" as "the entry of a plea of
guilty." This provision became effective on September
1, 1971, and the term "conviction" was to
clarify a previously uncertain meaning and "accord formal
recognition to the word ‘conviction’ as a verdict or plea of
guilty (without a sentence)." See N.Y. Crim. Proc. Law Sec.
1.20 staff notes (consd.).
A guilty plea
nonetheless constitutes a conviction from the time it is entered,
until the court has agreed to withdraw or vacate the plea. See New
York v. D’Amico, 556 N.Y.S. 2d 456, 458 (Sup. Ct. 1990), appeal
denied,
594 N.E.2d 947 (N.Y. 1992); see also New
York v. Alexander, 769 N.E.2d 802, 804 (N.Y. 2002).
The Commission has described the Form U4
as a "vital screening device" that is relied on by
"all the self-regulatory organizations, including the NASD,
state regulators, and broker-dealers to monitor and determine the
fitness of securities professionals." Rosario
R. Ruggiero, 52 S.E.C. 725, 728 (1996)
(stating that "[t]he candor and forthrightness of
[individuals making these filings] is critical to the
effectiveness of this screening process"); see
also Daniel Richard Howard, Exchange Act Rel. No. 46269, 2002 SEC LEXIS 1909, at *9-10 (July
26, 2002).
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| THE ARTICLES PUBLISHED HERE REPRESENT THE PERSONAL VIEWS OF THE
AUTHOR, AND NOT NECESSARILY THE VIEWS OF ANY LAW FIRM OR ORGANIZATION
WITH WHICH HE MAY BE AFFILIATED. ALL STATEMENTS MADE IN THESE ARTICLES
ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE,
NOR SHOULD THEY BE RELIED ON AS, LEGAL ADVICE. READERS MUST CONSULT
WITH QUALIFIED LEGAL COUNSEL BEFORE RELYING UPON ANY CONTENT CONTAINED
HEREIN. STATEMENTS MADE IN THESE ARTICLES MAY BE INCORRECT FOR YOUR
JURISDICTION OR AT THE TIME WHEN YOU READ SUCH STATEMENTS THE UNDERLYING
RULES, REGULATIONS AND/OR DECISIONS MAY NO LONGER BE CONTROLLING OR
PERSUASIVE AS A MATTER OF LAW OR INTERPRETATION. |
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