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NYSE Sanctions For Disclosure of Confidential Client Information Upheld - No Scienter Required For Violation of Equitable Principles Rule

Thomas W. Heath, III, Exchange Act Rel. 59223, January 9, 2009

Time since appeal filed - 1 year, 1 month, 25 days
Time since last brief - 10 months, 18 days
Pages - 20
Footnotes - 68


Heath was a rep at J.P. Morgan. NYSE found he had disclosed non-public information about a Morgan client in violation of the NYSE rule prohibiting "conduct . . . inconsistent with just and equitable principles of trade." Heath was censured and fined $100,000. The Commission upheld the sanctions.

In early 2005 Heath was an investment banker and managing director at Morgan but was planning to move to Banc of America Securities. While he was negotiating employment with Banc America Heath was managing Morgan's role as Hibernia Bank's lead advisor in connection with its proposed acquisition of Capital One. Heath accepted the offer from Banc America before the deal was completed, but intended to see it through.

Five days before the public announcement of the Hibernia deal Heath told an executive at Banc America, one Corrigan who was a former rival for the position he had been offered about the details of the acquisition, cautioning that the information was confidential and non-public.

Corrigan then contacted another Banc America executive and suggested Banc America might try to participate in the deal. That executive contacted Hibernia with a view toward trying to participate in the deal. Later Corrigan approached Heath to ask if there was room for other advisors on the transaction. After the deal was publicly announced Morgan placed Heath on leave after learning he had been the source of the leak that lead Banc America to contact Hibernia. Banc America after an inquiry revoked Heath's employment offer and terminated the two Banc America executives who were involved.

NYSE's hearing officer found in a summary judgment order that Heath had violated his duty to maintain the confidentiality of material non-public information. NYSE found that Heath's motive was self-serving as he intended to gain the trust of, and smooth things over with a soon to be colleague.


The Commission ruled that Heath violated "one of the most fundamental ethical standards of the securities industry" by disclosing confidential client information. This duty is grounded in fundamental fiduciary principles and is codified in NYSE's Code of Conduct. It specifically prohibits disclosure of confidential information to anyone outside the firm unless authorized to do so. Such duties continue after termination of employment according to the Code.

Heath argued that he could only be found to violate the rule if he acted in bad faith. He also claimed that if a good faith violation could be punished, he did not have fair notice of such an interpretation of the rule. The Commission rejected this argument noting that it has long held that violations are established by either bad faith or unethical conduct. Thus no scienter or bad motive is required to establish a violation.


This is a strong opinion that discusses in comprehensive detail the history and interpretation of the just and equitable practices rule of NYSE and FINRA. It reiterates an important point - no scienter is required for a violation of the rule when one engages in unethical conduct. Why did the Commission labored for so long on this case as it is neither factually nor legally complex given the Commission's prior interpretation of the rule. No new ground was broken here.