Time from appeal to decision - 1 year, 22 days.
Time from final brief to decision - 7 months, 30 days.
21 pages
Summary
The NASD expelled a securities firm and barred two persons, its CFO and Financial and Operations principal, and the CEO. The Commission sustained the expulsion of the fimr and the bars against the CFO, and CEO for violation of a NASD suspension order but reduced the separate sanction against the CFO for not properly responding to NASD information requests to a two year suspension.
In late 2002 the NASD ordered the firm's membership be suspended because it had failed to pay an arbitration award in favor of a customer. The firm conducted limited business after the suspension for about six weeks (earning $1895 in commissions). The suspension was lifted in May 2003. The NASD began an investigation into violation of the suspension order in early 2004 and sent three requests for information to the firm. It received an incomplete response to one of those requests from the CFO. NASD proceedings were begun in June 2004. Respondents claimed the NASD was biased against them and that various documents had not been properly served. Their motions were denied as was their motion for a postponement. At a pretrial hearing the CEO claimed his health problems prevented him from fully participating and he failed in another attempt to obtain an adjournment. The CFO sought to delay another prehearing conference claiming dire medical problems, but did not provide any documentation for her claims. The hearing officer issued a default order due to Respondent's failure to appear at the pretrial conference. After receiving medical documentation he scheduled another hearing to determine if the default should be lifted. Unsurprisingly, Respondent's also sought to delay that hearing on medical grounds. The NASD declined to lift the default.
The Commission found that the medical documentation did not address the ability of Respondents to appear at the hearings which were scheduled to be by telephone conference call.
The Commission rejected the claim that service of the suspension order on Respondent's counsel was improper because counsel only represented them for purposes of appealing that order because NASD rules do not provide for counsel to make a limited appearance.
Respondents claimed their lawyer never notified them of the suspension order but the Commission found the evidence showed they had actual notice of the suspension order.
The CFO claimed he was not at the firm due to the illness of a family member and could not be responsible for violation of the suspension order. The Commission rejected this defense noting that by law he was responsible for compliance unless he delegated that responsibility and monitored the performance of the person to whom that responsibility was delegated.
The CFO either did not respond, or provided incomplete, or tardy responses to several NASD requests for information.
The NASD hearing officer rejected certain pleadings by the respondents because of a faulty caption. The Commission found this was not an error.
The Commission found that operating the firm while suspended was a very serious breach and was too serious to allow Respondents to remain in the business.
It found no aggravating circumstances to justify departure from the sanction guideline of a two year suspension for failure to respond to information requests timely and completely.
Comment
The Commission found it was proper for the hearing officer to reject certain pleadings, apparently by the pro se individual Respondents because the caption of the pleadings was erroneous on the grounds that the hearing officer has discretion in managing the proceedings. There is no substantive discussion of this issue in the opinion. The Commission does not say what pleadings were involved or what issues they raised. This was the hearing officer that Respondents claimed was biased against them. The Commission's summary dismissal of this issue is not otherwise explained. Certainly if the pleadings were meaningful the hearing officer's rejection because of an incorrect caption would arguably in fact be evidence of bias. This is the kind of ipse dixit thinking that has gotten the Commission in trouble in several recent Court to Appeals decisions.
Perhaps in response to adverse Court of Appeals decisions cautioning the Commission to provide a full explanation when it bars an individual, the discussion in this opinion of why bars are appropriate is lengthy and detailed.
As to the bar imposed for failure to timely and fully respond to information requests, the Commission found the conduct to be aggravated. Yet the Commission found the complete bar excessive. NASD sanction guidelines provide for a bar when there is no response at all and for a two year suspension where there is an inadequate response.
Key Points
- Respondents carry the burden of proving that their default was excusable for medical reasons. They must demonstrate good cause for failing to appear at pretrial conferences.
- The fact that the hearing officer required Respondents to produce medical documentation did not demonstrate bias.
- Service of the suspension order on Respondent's counsel was proper under NASD rules.
- Respondents may not collaterally challenge the suspension order in these proceedings. The Commission previously upheld that order.
- Under NASD rules, the firm's FINOP was responsible for all matters "involving the financial and operational management of the member."
- The firm's President and CEO was responsible for compliance with the law unless that duty had been responsibly delegated.
- Information requests were sent to the registered address of the firm. It was not a defense for the CFO for her to claim that she did not receive prompt notice because the address had changed. This is because NASD rules provide for such requests to be sent to the registered address of the firm.
- Stating in response to a NASD request for information that requested documents are not available is not an adequate response. An explanation that details efforts to find the records is required.
- Concerning sanctions for delayed and incomplete responses to NASD inquiries, a two year suspension as provided in the NASD sanction guidelines is appropriate in "the absence of aggravating circumstances indicating a fundamental unfitness to participate in the securities industry. . . ."
