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Commission Upholds NYSE Bar and Limits Scope Of Discovery In "State Actor" Defense Cases

Michael Sassano, Exchange Act Rel. 58632 (September 24, 2008)

Time since appeal filed - 9 months, 21 days
Time since last brief filed - 6 months, 13 days
Pages - 23


Sassano was formerly a registered rep at Oppenheimer. He stated an intention to assert the Fifth Amendment and refused to testify in a NYSE investigation.  He claimed the NYSE investigation was so entwined with SEC and another investigation to cause it to be a "state actor" for Fifth Amendment purposes.  NYSE barred him. The Commission upheld the sanction.

NYSE's investigation involved possible frequent mutual fund trading. At the same time the New York Attorney General was conducting a similar investigation and had subpoenaed Oppenheimer. The SEC's Division of Enforcement had also issued subpoenas to Sassano and Oppenheimer in connection with a parallel investigation it was conducting. NYSE delayed Sassano's testimony twice at the request of his counsel.  Before his testimony he left his employment and his counsel requested a third postponement.  Counsel also requested that NYSE staff discuss settlement in lieu of the scheduled testimony. Sassano failed to appear at testimony session. SEC and NYSE staff then attended a meeting where Sassano's attorney made an attorney proffer. Counsel did not provide specific information during the proffer. NYSE enforcement declined the proposed cooperation offer from Sassano's attorney at the proffer session and rescheduled Sassano's testimony.  Sassano notified NYSE staff he would not appear. Sassano was then charged with failure to cooperate with the NYSE investigation.

Sassano argued to the hearing officer that a hearing should be conducted to determine, based on the Commission's Frank Quattrone decision whether the NYSE investigation constituted 
"state action" thus permitting him to invoke his Fifth Amendment rights.  The hearing officer ordered limited discovery.  The hearing panel then ruled that NYSE attendance at the proffer decision was not initiated by either the SEC or NYSE and rejected Sassano's state action claim.

The Commission noted that failure to appear for testimony establishes a prima facie violation of the cooperation rule. 

In dealing with the state action argument the opinion notes that "The 'Fifth Amendment restricts only governmental conduct and will constrain a private entity only insofar as its actions are found to be 'fairly attributable' to the government.'"  The Supreme Court has used a test for state action that requires such a "close nexus between the State and the challenged action 'that the seemingly private behavior may be fairly treated as that of the state itself.'" Factors to be considered include whether: a challenged activity is a result of the State's "coercive power;" whether the State has provided overt or covert encouragement that the private party must be deemed that of the State; whether the private party is a willful participant in joint activity with the State.  

The Commission also noted that the burden of demonstrating joint activities sufficient to invoke the state actor doctrine is high and falls on the party asserting that defense.  The opinion stated that Sassano was thus required to "demonstrate a specific nexus between the government and the [NYSE] requests for testimony. . . . "  

Sassano argued that sharing of information between NYSE, the SEC, and the New York AG was sufficient to conclude the such a nexus existed.  The Commission rejected this argument noting that it has previously ruled that cooperation and information sharing will rarely render a self regulatory organization a state actor and that such cooperation standing alone is generally insufficient to establish the defense.

The Commission also rejected a claim that the chronology of similar simultaneous investigations was sufficient to establish that NYSE was a state actor.  It noted that multiple parties pursuing similar investigative steps is not unusual. An important factor in supporting this conclusion was that Sassano had produced no evidence that NYSE was acting as a result of government "persuasion or collusion."

Of note is the Commission's comment that the joint proffer session was sufficient evidence for allowing Sassano to develop through discovery evidence of possible NYSE and SEC collusion as was done in this case.  Here, the critical fact is that the joint proffer session was proposed not by the SEC or NYSE, but was instigated by Sassano's lawyer.

The Commission also declined to order additional discovery as it has previously done in other cases of recent vintage such as Quattrone.  It explained those remands as involving cases where the SRO had not made its staff available for testimony or provided affidavits as it did here.


This case does not use the weak language about discovery remands in some of the Commission's previous state action cases.  The Commission here signals a distinct shift compared to some of those earlier cases as it makes clear that while discovery may be appropriate that process "may not [be] use[d] . . . to go on a fishing expedition . . . ."  Further, an appeal based on a state action defense "is subject to dismissal if the applicant 'fail[s] to introduce sufficient evidence' to justify his state action claim."  It also noted that discovery is not mandated whenever there is a state action claim and should be ordered only when there is a "reasonable and credible basis" to conclude the SRO was acting as a state agent.  Further, the opinion indicates that discovery should be limited.  On appeal, attempts to obtain a remand to engage in additional discovery must be extremely specific, including an explanation of specific information to be sought and an explanation of the significance of that information.

The Commission also used strong language in justifying a permanent bar for an associated person who refused to testify noting, "a complete failure to respond to a request for information . . . renders the violator presumptively unfit for employment in the securities industry."