Statutory Disqualification Index
SEC and FINRA
CASES OF NOTE
SD06012
NOTE: Stipulations of Fact and Consent to Penalty (SFC); 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 & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

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.

Filed Under: Felony, DUI, Recency, Treatment/Rehabilitation, Prior misconduct, Adequacy of plan, Denial
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
  1. X’s felony conviction is recent, and she will remain on probation until 2010;
  2. she failed to disclose her 2005 felony conviction to the Firm;
  3. 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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