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NYSE Sanction Decision Remanded

James Gerard O'Callaghan, Exchange Act Rel. 57840 (May 20, 2008)

Time since appeal - 10 months, 25 days
Time since last brief - 7 months, 17 days
Pages - 18
Footnotes - 42 


O'Callaghan, an independent NYSE floor broker appealed a NYSE disciplinary action.  NYSE found that he violated Exchange Act Section 11(a) and Rule 11a-1 and NYSE rules by initiating and executing trades for an account of his father-in-law over which he had investment discretion.  That Exchange Act section specifically prohibits floor brokers from trading for an account over which the broker exercises investment discretion.  NYSE fined him $30,000 and suspended him for three months.  The Commission upheld the findings of violations, but remanded the sanctions to NYSE for further explanation.

O'Callaghan admitted that he had trading discretion over the account and that he was trying to save his father-in-law commissions by charging him floor broker rates.  He also loaned money to the account but did not receive interest  payments for the loans.  NYSE found that O'Callaghan's investigative and hearing testimony were contradictory.  

Under NYSE rules, a floor broker is prohibited from generating an order on the floor, determining the stock, size of the order, or whether it is a buy or sell.  Under NYSE rules, a floor broker with trading discretion would be required to place the order initially with an "upstairs" trading desk which would transmit it to an unaffiliated floor broker for execution, thereby precluding the "initiating" floor broker from exploiting his "time and place advantages" by executing the order himself.  O'Callaghan's own expert agreed that a floor broker could not create an order and execute it himself on the floor.

O'Callaghan testified in his own defense, but did not call any witnesses to corroborate his claims.  He did not call his father-in-law to testify, claiming he was ill.  The hearing panel specifically found that O'Callaghan was not credible as he gave contradictory explanations for his conduct.  

The main claims on appeal involved allegations that NYSE had denied O'Callaghan due process and failed to give him a fair hearing.  The Commission rejected these claims, finding the hearing process to be fair.  It noted that constitutional due process requirements to not apply to self-regulatory organizations.  O'Callaghan's primary claim was that NYSE had not obtained tapes of his telephone calls even though he had the ability to obtain them from the third-party vendor that kept them but did himself do so.

The fact that the violations occurred in 2000 and 2001, but the hearing did not begin until early 2005 did not constitute an unreasonable delay and O'Callaghan produced no evidence of prejudice resulting from this delay.

The Commission found that NYSE had not sufficiently articulated a remedial purpose for the three month suspension imposed on O'Callaghan.  It noted that the the purpose of an expulsion or suspension is to protect investors, not punishment.  NYSE in its decision noted that a three month suspension had the potential to be "catastrophic and terminal" on O'Callaghan's business.  Yet it also found mitigating factors.  The Commission found that NYSE had not explained how a three month suspension would protect the public.  It also noted that a detailed explanation of mitigating factors was required.  


The Commission itself has been reversed in recent years by various courts of appeals for failure to carefully articulate the basis for its sanctioning decisions.