Time since remand - 8 months, 22 days
Time since last brief - 3 months, 23 days
Pages - 13
Footnotes - 33
Summary
In 2005 the Commission issued an opinion sustaining NASD sanctions against Paz Securities and Mizrachi, the president of the firm. Paz was expelled and Mizrachi was barred. In 2007 the D.C. Circuit remanded the case and ordered the Commission to consider whether lesser sanctions were appropriate. The Court held that the Commission "did not adequately explain why the sanctions the NASD imposed were not punitive rather than remedial." The sanctions were based on failure to timely cooperate with a NASD investigation.
The Commission on remand again sustained the sanctions.
Discussion
The Commission noted that NASD sanction guidelines require a bar for complete failure to cooperate absent mitigating circumstances. The Commission found this appropriate as a complete failure to cooperate renders the violator "presumptively unfit" because industry self-regulation cannot be effective without compliance with the rule that requires cooperation with NASD investigations. This is because the NASD plays an important role, established by statute, and has no subpoena power. Thus, its cooperation rule is the only way it can effectively conduct investigations of possible wrongdoing. Therefore, the Commission found the cooperation rule and presumptive bar for violations to be wholly consistent with the purpose of the Exchange Act, namely the protection of public investors.
Paz and Mizrachi argued that they did not wholly fail to cooperate and that there were mitigating factors that rendered the sanctions punitive and excessive. The Commission found that they were not merely slow to cooperate because the NASD had sent three requests for information that were not answered promptly. Here, there was no response until after the NASD had charged Paz and Mizrachi in formal disciplinary proceedings that they failed to appear at. In fact, they provided information only after a default had been entered revoking the firm and barring Mizrachi. This was more than eight months after the original request for information. The Commission found that the NASD should not have to bring disciplinary proceedings in order to compel cooperation.
The Court of Appeals remanded for the Commission to consider whether the conduct was mitigated because Paz and Mizrachi argued that they did not monetarily benefit, there was no injury to the investing public, and the information sought did not relate to injurious conduct.
The Commission noted that failure to cooperate with the NASD will never result directly in monetary benefit and rarely will it result in direct harm to a customer. It noted that the fact that the NASD did not charge underlying violations is of no significance because Paz had already been revoked and Mizrachi barred thus rending any further investigation moot.
Further, the Commission noted that the argument that the failure to cooperate did not involve injurious conduct was mistaken because the underlying investigation involved violations of NASD rules that could have involved harm to customers. The effect of the failure to cooperate was to shield transactions with customers from regulatory oversight. Also, the transactions being investigated had implications for enforcement of the net capital rule which is designed to protect the public from failure of a firm. Further, the importance of information requests must be measured at the time it is made, not with hindsight.
It is not appropriate to revoke and bar only when the underlying NASD investigation involves known fraudulent activity.
The Commission noted that lack of disciplinary history is not a mitigating factor because there should be no reward for complying with the duties imposed on a securities professional. Finally, the Commission noted that there is risk Paz and Mizrachi will engage in future misconduct. It based this finding on the fact that Mizrachi travels extensively, but did not arrange for someone to act in his absence to respond to NASD requests or notify NASD of his address changes.
Comment
The Commission too often in the past has not explained its sanctions or reasoning in its opinions and has of late been severely chastised by the D.C. Circuit in a number of cases. Here it does offer a detailed explanation. We will have to see whether the appellate court finds this exposition persuasive. My own judgment is that it has improved substantially its explanation of sanctioning decisions recently.
