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Charles C. Fawcett, IV, Exchange Act Rel. 56770, November 8, 2007

NASD appeal.  5th amendment assertion in NASD investigation.

Time between appeal and decision - 8 months, 30 days.
Time between last brief and decision - 6 months, 9 days
Pages - 14


NASD found that Fawcett violated its cooperation rule, barred him, and ordered him to pay costs of $1500.  The Commission sustained the NASD.

Following an investigation by the New York Attorney General into market timing and late trading of mutual funds NASD began an investigation of Fawcett.  Following a subpoena by the AG to his employer Fawcett deleted nine e-mails from his computer.  The day after he deleted the e-mails, Fawcett's firm sent out a memorandum to employees instructing them to save relevant documents, including e-mails.  Fawcett's employer began an internal investigation and Fawcett failed to disclose in an interview that he had deleted the e-mails.  Later, Fawcett contacted counsel who had conducted the interview and admitted he had deleted "a couple" of e-mails because he had panicked.  He further admitted he knew about a subpoena before he deleted the e-mails.  The e-mails were ultimately recovered.  The employer determined that three of the deleted e-mails were not covered by the subpoena, six were.  Respondent was fired by his firm because he had deleted e-mails relevant to a regulatory investigation.

Over a five month period NASD sent three written requests for information to Fawcett.  His attorney requested an extension of the first deadline due to pending SEC and New York investigations.  The NASD staff denied this request.  The second NASD request met a similar response, in which Fawcett's lawyer claimed he was under criminal investigation.  NASD staff also denied this request for an extension of time to respond.  Finally, NASD asked Fawcett to appear to testify under oath and produce documents.  He failed to do so.

Fawcett argued that he was entitled to invoke his Fifth Amendment rights and refuse to provide information to the NASD without sanction.  This is not a new issue for the Commission.  It found that NASD is not inherently a state actor before whom the Fifth Amendment applies.  As it has done before, the Commission rejected an argument that because the NASD exercises a "public function" delegated by Congress, persons may invoke the 5th without consequence.  As the Commission stated, "Fawcett's position, however, is directly contrary to established precedent, and we find no basis in this case for departing from that precedent."

The Commission noted that the Second Circuit has previously ruled that the NASD is a private actor, not a state actor.  It distinguished the Brentwood Academy v. Tennessee Secondary Sch. Athletic Ass'n case, noting that there was no allegation of cooperation or interaction between NASD and the government in this case that would justify a finding that NASD effectively engaged in state action.  

Fawcett also argued that the e-mails were not relevant to NASD's investigation.  The Commission, citing long standing precedent noted that it "does not fall to the recipient of an NASD information request to decide for himself whether his compliance would assist NASD's investigation."

Last, the Commission noted that in evaluating sanctions, Exchange Act Section 19(e)(2) requires it to sustain them unless it finds, with due regard for the public interest and protection of investors that the sanctions are excessive, oppressive, or impose an unnecessary or inappropriate burden on competition.  The Commission sustained the sanctions because, among other things, they are consistent with NASD Sanction Guidelines, there was no mitigation, and general deterrence is served.   The Commission noted particularly the importance of the NASD cooperation rule given NASD's lack of subpoena authority.   


Strangely, in concluding that Fawcett's "Hobson's choice" was not a mitigating factor, the opinion does not cite the various cases holding that there is no absolute right to assert the Fifth Amendment in a civil case regardless of whether this presents such an unpleasant choice.  See, for example, Baxter v. Palmigiano, 425 U.S. 308 (1976), SEC v. Dresser Industries, Inc., 628 F.2d 1375 (D.C. Cir. 1980), cert. denied 449 U.S. 993 (1980).

This is another case that presented no significant factual or legal issues.  Yet it took the Commission more than six months to issue the opinion after the last brief was filed.