Permanent Injunction/Statutory Disqualification
In the late 1960s, Morton Kantrowitz
participated in a scheme in which
he and others created the false
appearance of a market for the stock of American Continental Industries
("ACI"). As a result, various lending institutions were induced
to make loans totaling more than $720,000 with ACI stock pledged as
collateral for the loans. The loans subsequently defaulted.
The SEC alleged that the two largest shareholders of ACI stock
registered representatives, including Kantrowitz, and convinced them to
insert quotations in the pink sheets, published by the National Quotation
Bureau, Inc., with an understanding that the traders would be protected
against loss. Kantrowitz, at the time a vice president, director, 30%
shareholder, and trader of a broker-dealer, inserted 45 to 50 quotations
per day during the relevant time period.
In 1969, without admitting or denying the allegations in
the SEC's complaint, Kantrowitz consented to the entry of
the permanent injunction prohibiting
him from further violations of Section 17(a) of the Securities Act of 1933
and Sections 10(b) and 15(a)(2) of the Securities Exchange Act of 1934 and
Exchange Act Rules 10b-5 and 15c2-7, and, accordingly, became subject to a statutory disqualification.
In 1970, the Commission instituted administrative proceedings arising
from the same facts, and found that Kantrowitz
aided and abetted a fraudulent scheme by placing fictitious quotations for
a stock in the pink sheets. He was suspended for three months.
Under Securities Exchange Act Section 3(a)(39), 15 U.S.C. §
78c(a)(39), a person is subject to a "statutory
disqualification" if, among other things, "such person . . . is
enjoined from any action, conduct, or practice specified in subparagraph
(C) of such paragraph (4), . . . ."
Under NASD By-Laws, Article III, Section 4(h), a person is subject to a
"disqualification" if, among other things, such person "is
permanently or temporarily enjoined . . . ."
By-Laws, Article II, Section 3(b), the NASD may bar a person
from becoming associated or continuing association with a member if such
person is subject to a disqualification.
Under Exchange Act Section 3(a)(39), 15 U.S.C. § 78c(a)(39), and
under NASD By-Laws, Article III, Sections 4(g)(1)(i) and (ii), NASD Manual
at 1307, a person is subject to a statutory disqualification if, among
other things, he or she is convicted of a misdemeanor, within 10 years
preceding the filing of any application for membership or association,
arising out of the conduct of the business of a broker-dealer or involving
the making of a false report.
NASD Approves Return
In 1971, the NASD approved Kantrowitz's application to return
to the securities industry. The suspension was completed in 1972.
Thereafter, Kantrowitz was associated with a broker-dealer until 1992.
In 1992, Kantrowitz pled guilty in New York state court to falsifying
business records. Kantrowitz admitted that, while employed as a trader for
Nash Weiss Securities, a member firm, he agreed to "park"
securities for another broker-dealer which ultimately resulted in false
entries in that broker-dealer's FOCUS report. Kantrowitz was sentenced to
a one-year period of conditional discharge. This conviction ceased to be a
statutory disqualification as of October 15, 2002.
Before the expiration of the 1992 statutory disqualification, three
different member firms submitted MC-400 applications on behalf of
Kantrowitz seeking to employ him. NASD denied those applications, and the
Commission sustained the two denials that Kantrowitz had previously
appealed. Morton Kantrowitz, Exchange Act. Rel. No. 44239 (May 1, 2001), 74 SEC
Docket 2406 (noting that the proposed supervisor had left the member firm,
and that firm had not amended its application to propose a new supervisor)
and Morton Kantrowitz, 52 S.E.C. 721, 723 (1996) (stating that the
"conviction at issue, while a misdemeanor, reflects poorly on
Kantrowitz's integrity" and noting our earlier suspension).
Two Down But One to Go
In April 2003, the NASD's Department of
Member Regulation ("Member Regulation"), recommended denial of the
Great Eastern application.
Member Regulation found that Kantrowitz had engaged in a pattern of
fraudulent conduct and that it was not in the public interest to allow
Kantrowitz to associate with Great Eastern in any capacity.
In December 2003, the NASD's National Adjudicatory Council ("NAC")
denied Kantrowitz's application to associate with Great Eastern. Before
the NAC, the Firm proposed that Craig Felty be Kantrowitz's supervisor.
Felty has no disciplinary history and has experience in supervising
disqualified persons. The NAC specifically found that the Firm's proposed
heightened supervisory structure was "not inadequate."
Pointedly, the NAC also stated that it was not troubled by the Firm's
regulatory history. In 2002, the Firm consented to a fine of $7,500 in an
Acceptance, Waiver and Consent for failing to comply with the reporting
requirements of the Order Audit Trail System. In 2003 NASD issued a Letter
of Caution to the Firm for failing to submit a copy of a response to an
observed, based solely on Kantrowitz's commission of the two acts of
securities-related misconduct, that Kantrowitz's regulatory history was so
grave that he should not be permitted employment in the securities
industry. In reaching its determination, the NAC stated that the standards
set forth in the Commission decisions in Paul Edward Van Dusen, 47 S.E.C. 668 (1981)
and Arthur H. Ross, 50 S.E.C. 1082 (1992) do not apply in determining whether to grant or
deny the Firm's application.
Kantrowitz appealed the denial to the SEC.
third MC-400 application was filed by Great Eastern (the "Firm")
and proposed that
Kantrowitz function in the following limited capacity:
1. He will introduce
potential customers to the Firm to buy or sell securities for their own
accounts solely on an unsolicited basis.
2. All accounts referred to Great
Eastern by Kantrowitz would be reviewed by his supervisor.
Kantrowitz will be listed on Great Eastern's new account form as the
representative who introduced these new accounts, he would not perform any
of the duties of a registered representative for the accounts.
acceptance of an account referred to Great Eastern by Kantrowitz, the Firm
proposes to assign another qualified registered representative to carry
out the duties with respect to the account.
5. Kantrowitz's sole compensation
from Great Eastern would be an override, no more than fifty cents per
transaction, of the commissions earned from unsolicited transactions
executed by the Firm for the accounts introduced by Kantrowitz.
would not have authority to hire any person, would not trade a firm
proprietary account, and would not handle customer or firm funds or
A Two Down But One to Go
In reviewing the NASD's denial of Kantrowitz's application, the SEC
dramatically foreshadows it's ultimate decision by noting that
"because the NAC decision did not follow the standards set forth
in Van Dusen and Ross in evaluating the application, we are unable to
determine whether NASD applied its rules in a manner consistent with the
purposes of the Exchange Act. We thus remand this matter to NASD for
NASD argued that Van Dusen didn't apply to Kantrowitz's
because the case applied only to matters in which the SEC imposed a
conditional bar (one in which there is a right to reapply granted
after the expiration of a specified term) and the application was
submitted after the term's expiration. In NASD's view, the
Van Dusen analysis does not apply to Kantrowitz's 1969 injunction because
it "included no right to reapply after a specified period of
time." NASD also contends that the SEC did not weigh the
requirements of the public interest, as it had in Van Dusen, when it
imposed the three-month suspension on Kantrowitz in the related
Is Van Dusen limited to cases where
the applicant was subjected to a conditional bar but permitted to
reapply after a specific period of time, and that time has expired?
No. The SEC didn't agree with the NASD's analysis of the scope of
Van Dusen. In Reuben D. Peters, Exchange Act Rel. No. 51237 (Feb. 22,
2005), the SEC stated that
Van Dusen extends to the application of a statutorily
disqualified person who was also the subject of
sanctions imposed under the Exchange Act. Under that more expansive
standard, Kantrowitz would be covered. For
a detailed analysis of Peters visit http://rrbdlaw.com/2004/0406peters.htm
Does Van Dusen require the NASD to
automatically approve an application for reentry upon the expiration
of a conditional bar?
No. The SEC noted that even with a conditional bar, an applicant's
reentry is not "automatic" after the expiration of a given time
period. Van Dusen instructs the NASD to consider other
as, "other misconduct in which the applicant may have engaged, the
nature and disciplinary history of the prospective employer, and the
supervision to be accorded the applicant." Also, Ross states
that if an applicant had engaged in additional misconduct which was
similar to the misconduct underlying a bar order in which the time
prohibiting application had passed, it is appropriate to consider both
instances of misconduct "as forming a significant pattern" which
might justify the denial of an application.
Was the NASD correct that the SEC
didn't consider the "public interest" when suspending
No (and what was the NASD thinking when it made such comment ---
akin to a slap in the SEC's face). Somewhat defensively, the SEC explained that
its authority to impose any sanction pursuant to Exchange Act Section 15
requires that it make a public interest finding. More to the point, the
SEC specifically noted that "the law judge engaged in a lengthy analysis of the public
interest in suspending Kantrowitz."
Van Dusen and Ross Standards
two cases hold that membership continuance or MC-400 applications
must be granted absent other
acts of misconduct or circumstances of record bearing adversely on a
member firm's or individual's fitness
to continue in the securities industry. Accordingly, an NASD inquiry
must focus on any "other
[intervening] misconduct in
which the applicant may have engaged, the nature and disciplinary
history of a prospective employer, and the supervision to be
accorded the applicant."
1. where the
time period specified in a
conditional bar order has expired;
2. where no "new information"
or additional misconduct has been raised,
it is inconsistent with the
remedial purposes of the Exchange Act to deny an application for reentry.
Kantrowitz argues that the NASD imposed a "two strikes
and you're out" policy. He accuses the NASD of denying his reentry
because of two instances of misconduct and ignoring other factors, such as the limitations placed on his activities
and the proposed supervisory scheme. Considering those points, the SEC
cited Van Dusen as emphasizing that disciplinary actions are not
penal but remedial:
Their imposition serves to deter both the particular respondents
as well as others in the securities industry from committing violations of
the securities laws. We have been cognizant of the importance of
exercising the discretionary power reposed in us in this area in a manner
that will afford investors protection without visiting upon the wrongdoers
adverse consequences not required in achieving the statutory
Van Dusen and Ross require NASD to be guided by the public
interest determination and the sanctions imposed when reviewing
applications for reentry. Because the NAC did not apply these standards,
the SEC could not
determine whether the NAC properly considered the record before it. The
NAC based its denial of Kantrowitz's application solely on the two
instances of misconduct, the injunction and the state misdemeanor
conviction. The NAC explicitly refrained from determining whether these
two instances demonstrated a "significant pattern of misconduct"
or otherwise indicated a reason to deny Kantrowitz's association.
The SEC cautioned that while Kantrowitz's 1992 conviction is no longer a statutory
disqualification, it is additional misconduct that occurred after his 1972 suspension.
However, in a somewhat ominous comment the SEC notes that the NASD asserts the importance of its
ability to evaluate "appropriate business standards for its members .
. . . [p]articularly in matters involving a firm's employment of persons
subject to a statutory disqualification." However, the SEC holds the
NASD's feet to the fire by admonishing the organization that "the NAC also
stated that it had no objection to the supervision to be provided
Kantrowitz or the regulatory history of the Firm."
The SEC remanded the application to NASD for further consideration