FINRA Sanctions Upheld After Circuit Remand - Bar For Failure To Cooperate Not Punitive - Ruling Deferred On Advice of Counsel As Mitigation

Howard Brett Berger, Exchange Act Rel. 58950, November 14, 2008

Time since appeal - 1 year
Time since last brief - 9 months 20 days
Pages - 21
Footnotes - 74!

Summary

The Commission sustained findings by NASD that Berger had not cooperated in an investigation and upheld NASD's bar. After Berger appealed to the Second Circuit, the Commission asked that the matter be remanded to it for reconsideration of the sanction in light of the D.C. Circuit opinion in Paz Sec., Inc. v. SEC, 494 F.3d 1059 (2007). This opinion considers only whether the bar is appropriate. Paz ordered the Commission to reconsider NASD sanctions "whether the sanctions were excessive or oppressive 'in light of the factors raised in mitigation and to consider . . . whether the sanctions serve[d] a remedial purpose as required by the [statute]."

Berger applied to register with a firm just as his registration status was about to expire (two years after association ceases). His reapplication was not completed and his registered status expired. NASD then began an investigation of Berger's conduct during the period when he was still deemed registered. He failed to appear as required by a NASD notice and his appearance was rescheduled. Berger got new counsel who advised him not to appear based on a claim that NASD had no jurisdiction over him. The Commission previously ruled that Berger was an associated person and subject to NASD jurisdiction because he had applied to associate with a firm.

As it has often stated in the past, the Commission noted that because NASD has no subpoena power and its rules mandate cooperation with investigations failure to cooperate seriously undermines the self-regulatory obligations of NASD. The opinion in essence holds that there is a per se rule supporting bars for such persons. NASD sanction guidelines provide for a bar should be standard when there is no response. They provide for a two year suspension when there are mitigating factors. Only two other NASD rule violations have a bar as the recommended sanctions. A complete failure to cooperate with no mitigation merits a bar and is for a remedial purpose - the preservation of the effectiveness of the self-regulatory system in aid of investor protection.

Discussion

Berger argued that he had a good faith belief he was not subject to NASD jurisdiction and also that he relied on the advice of counsel which should be considered a mitigating factor.

NASD has no mechanism for a person to contest its jurisdiction before a requested appearance. The appropriate way to contest jurisdiction is to appear and challenge jurisdiction using the NASD forum. It was appropriate for NASD to consider Berger's previous disciplinary history that involved "significant, multiple acts of past misconduct." It is not appropriate to judge the seriousness of Berger's lack of cooperation by whether or not the investigation resulted in separate disciplinary proceedings. The fact that NASD does not condition bars on eventual cooperation does not render the sanction punitive. NASD should not have to bring disciplinary proceedings to obtain compliance with its rules. Because NASD does not have subpoena power or other methods of enforcing its information demands, cases involving conditional sanctions in the context of civil contempt and similar situations are not applicable.

Berger claimed that his counsel advised him not to appear because NASD had no jurisdiction over him and that counsel never advised him that his failure to appear could result in a bar. Reliance on SEC v. Howard, 376 F.3d 1136(D.C.Cir. 2004) is not appropriate because advice of counsel in that case went to scienter, which is not an element of the failure to cooperate defense. Howard did not address the issue of whether advice of counsel qualifies as a mitigating factor in considering sanctions. The Commission ruled that to establish advice of counsel as a sanction mitigating factor, all elements of the formal defense must be established. Here, Berger did not present the actual advice rendered by counsel, but only submitted his own "say so." SEC v. McNamee, 481 F.3d 451, 456 (7th Cir. 2007). He should have produced an opinion letter from counsel or the counsel's testimony. As a result, the Commission did not consider whether advice of counsel could be a mitigating factor because Berger failed to prove it.

Comment

The Paz case will be an ongoing saga as it prohibits sanctions that are punitive rather than remedial. It will be interested to see how the Commission navigates this hair splitting exercise and the reaction of the D.C.Circuit. One has to wonder whether the distinction insisted on by the circuit is actually workable. Stay tuned. The requirement that the elements of the advice of counsel defense be very strictly adhered to even when attempting to establish mitigation is significant and the opinion provides a clear road map for defense counsel who wish to do so. The opinion leaves unresolved the issue of whether a properly established advice of counsel defense should be considered a mitigating factor.

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

Summary

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.

Comment

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."

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

Summary

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.   

Comments

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.

Morton Bruce Erenstein, Exchange Act Rel. 56768, November 8, 2007

NASD appeal, failure to cooperate

Time between appeal and decision - 9 months, 30 days.

Time between last brief and decision - 6 months, 21 days.

Pages - 17

Summary

Respondent, a registered representative appealed NASD sanctions.  The NASD found that he had failed to answer a question about his tax returns during testimony before the NASD staff and failed to timely respond to a written request for information from the NASD.  He was suspended from association for one year.

The NASD inquiry was based on a customer complaint that claimed Erenstein had, among other things, made unsuitable recommendations to a customer, and converted a customer's funds.  After his counsel responded to a request for a written response to the complaint, respondent then provided testimony to NASD staff.  He claimed that that the purportedly converted funds was compensation paid by the customer for assistance in liquidating certain securities.  He claimed he had orally informed his firm of this arrangement, but admitted he did not obtain written approval from his firm for this outside activity.  During his testimony he refused to answer a question from NASD staff about whether he reported the $10,000 he claimed was income on his tax returns. He claimed he had no documents that would verify that he had done specific work for the customer to earn the purported fee as opposed to converting the funds.  NASD staff then asked him to provide copies of his tax returns.  He refused to do so.  Respondent's counsel argued that the tax information was not relevant or that it was subject to a "heightened " standard of relevance.

About 7 months later, after receiving a Wells notice concerning possible disciplinary charges, respondent submitted the tax returns "under protest."  The $10,000 was not included in his initial tax return for the year in question, but was included in an amendment filed 5 years later. 

After proceedings were filed by the NASD, respondent filed for bankruptcy.  A discharge was entered by the bankruptcy court and the NASD staff determined not to seek monetary penalties against respondent.  

The NASD hearing panel imposed a bar.  On appeal the NASD reduced the sanction to a one year suspension, noting that respondent had eventually produced the tax return information sought by NASD staff.

The Commission found that there was no dispute concerning the facts that established the violations.  

The Commission also found that there is no obligation for the NASD to explain why it sought the information being sought as the rule speaks of "any matter involved in" an investigation.  The Commission cited various long standing precedent and noted that it is well established that an associated person may not "second guess" an NASD information request or "set conditions on their compliance."  A belief that the NASD does not need the information is no excuse for failure to provide it.  Thus, the NASD is not required to establish the relevancy of the request.  However, the Commission found the information requested here to be relevant, noting that omission of the money from his tax returns could support an inference that he had converted the funds and reporting the income would support an inference he did not.

Respondent's argued that because he acted on the advice of counsel, a sanction based on that advice denied him his right to counsel.  He also argued that tax returns are confidential and that "discovery" is permitted only with a heightened showing of relevancy.  The Commission distinguished the cases cited by respondent concerning limits on NASD inquiry.  It noted that the Quattrone case involved only the issue of whether there was a genuine issue of material fact concerning whether the NASD complied with its own rules, and therefore summary disposition was inappropriate.  The Ochanpaugh case is not relevant because it dealt with the issue of whether the information sought by the NASD constituted  books of an associated person.  Here there was no question but that the tax returns were respondent's and in his possession.  

Also, the Commission rejected the argument about confidentiality of tax returns, noting that the courts permit such discovery where the taxpayer has made an issue of his income or where they are relevant and the information is not easily obtainable from another source. The Commission found that the cases cited by respondent do not support his claim that tax returns are subject to a heightened relevancy standard.  Here, respondent made his income an issue by claiming the money he had received was income he earned due to services he provided his customer.

Finally, the Commission dismissed the reliance on counsel argument by noting that reliance on counsel is immaterial to a person's obligation to supply information to the NASD.  Further, the NASD in imposing a sanction, took into account that respondent had relied on counsel's advice.

Respondent raised a number of procedural objections, including to the length of time the NASD took to consider the matter.  These were all rejected by the Commission.  It noted that the decision it reviews is that of the NASD on appeal, not the hearing panel decision.

Last, the Commission rejected respondent's claim a that the sanction was excessive.  It noted the crucial nature of the NASD cooperation rule because the NASD lacks subpoena authority to conduct investigations. The NASD guidelines provide for a two year suspension where there is mitigation.  Here, the one year suspension struck the appropriate balance according to the Commission.  The Commission also found that general deterrence is an appropriate goal in sanctioning, but that it is not sufficient by itself, as a justification for a suspension.  

 

Comment

In dealing with the tax returns, the Commission did not distinguish a NASD investigation from discovery in a civil matter and arguendo assumed the relevancy of the concept, finding on the facts that respondent had made an issue of his income.  It could have quashed this line of argument permanently by simply noting that the ability of NASD (or its own staff) to investigate a matter is simply not governed by the standards that may apply to discovery in a civil matter.  See, for example, SEC v. Isbrandtsen, 245 F.Supp 518 (S.D.N.Y., 1965) ( SEC entitled to make persistent and thororough inquiry).

The Commission has again provided an extensive discussion of why it believed the sanction appropriate in this case. 

Again, my long standing query --- why did it take 9 months to issue this decision?  The matter was routine and raised no difficult legal or factual issues.

Gregg Heinze, Exchange Act Rel. 56100 (July 19, 2007)

NYSE Appeal, failure to provide testimony to NYSE.

Time between appeal and decision - 8 months, 27 days.
Time between last brief and decision - 5 months, 20 days.
Pages - 10.

Comment

This is a rehash of the Turk decision of June 22, 2007 (see below). Respondent was a NYSE specialist.  Heinze asserted the 5th Amendment in response to an SEC subpoena and refused to appear before the NYSE in connection with a related investigation.  The Department of Justice was also conducting an investigation. The NYSE barred Heinze because of his failure to testify in its investigation.  Heinze claimed that the SEC, NYSE and DOJ were conducting a joint investigation and that hence the NYSE was a "state actor" subject to the 5th Amendment.

Just as in the Turk case, the Commission remanded to the NYSE to allow Heinze to develop his defense that the NYSE investigation, SEC investigation, and DOJ inquiry were so intertwined that he should be permitted to assert the 5th Amendment.

No surprise here, just a rehash of the Turk decision.

Here, the respondent alleged that NASD staff made comments indicating SEC control over its investigation.  Further, the Commission found that these allegations, if credible "would suggest the possibility that the Division exercised significant control and influence over the NYSE's investigation of Heinze, which would be relevant to a state action inquiry."  The remand was based on these circumstances and the fact that the NYSE decision came before recent Commission decisions such as Turk and similar cases.

Warren E. Turk, Exchange Act Rel. 55942 (June 22, 2007)

NYSE Appeal

Time between appeal and decision - 1 year, 8 days.
Time between last brief and decision - 6 months, 26 days.
Pages - 10

Summary

The NYSE found that Turk, a former specialist had failed to provide testimony in connection with a NYSE investigation.  He was censured and barred.   The Commission remanded the matter to the NYSE.  Turk claims that he could not be charged for failing to testify in the NYSE investigation because he could invoke his 5th Amendment rights at such testimony as the NYSE is a "state actor", or because in this case, it was acting as one.  The Commission rejected the claim that the NYSE is generally a "state actor", relying on previous SEC and court decisions.  The Commission remanded because the 5th Amendment does apply to a non-state actor whose actions are "fairly attributable" to the government.  

The Commission has recently remanded similar matters to self regulatory organizations.  See, Frank P. Quattrone, Exchange Act Rel. 53547 (March 24, 2006),  Justin F. Ficken, Exchange Act Rel. 54699 (November 3, 2006).  The hearing here was before the Quatrone decision and the record concerning Turk's claims was sparse.  

On remand Turk must have an opportunity to develop a full evidentiary record and must have "a full opportunity to conduct discovery."  However, such discovery is not grounds for a "fishing expedition" and "a respondent must provide a reasonable and credible basis to conclude hat the SRO's relationship with the government in the case suggests 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.'" (footnote omitted).

This decision is interesting due to the Commission's contradictory discussion of the scope of discovery that Turk will be entitled to on remand.  On the one hand, it held that mere cooperation and coordination between the government and the NYSE was unremarkable and insufficient to establish the defense.  One the other hand, it ordered that Turk be given a "full  opportunity" to conduct discovery.  Yet, it qualified that pronouncement with the seemingly contradictory caveat that Turk could not use discovery as a fishing expedition and would be required to specifically justify his discovery requests.  This rather unhelpful formulation will not assist the NYSE much on remand.  For example, will Turk be permitted to depose Commission, NYSE, and DOJ staff to determine the extent and nature of their cooperation and coordination?  Will Turk be permitted to review staff notes of meetings?  Unfortunately, the opinion is silent on these issues.

Key Points

• Self regulatory organizations such as the NYSE and NASD are private actors.  D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir. 1999), cert. denied, 531 U.S. 1069 (2001).
• Cases dealing with firing of government employees for asserting their 5th Amendment rights are inapplicable and do not apply to self regulatory organizations.
• Private parties' actions "may constitute state action if there is 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.'"
• The burden of establishing joint activities sufficient to render a SRO a state actor is high.
• Mere cooperation and coordination of a SRO with the SEC or the DOJ will rarely render the SRO a state actor.
• On remand respondent must justify discovery with specificity pursuant to the standard used for permitting discovery in response to a motion for summary judgment.  He must show that the specific proposed discovery would lead to information that would support his claims.

Further Discussion

Turk testified before the SEC staff and was scheduled to testify before the NYSE staff.  Before that testimony staff of his firm advised him that he was being placed on leave at the request of the U.S. Attorney's Office.  He then notified the NYSE that he would not testify.  Turk was then charged in an administrative proceeding by the SEC and a separate NYSE proceeding. Approximately 7 months later, Turk advised the NYSE that he was prepared to testify because he no longer felt it likely that he would be criminally charged.

Rooney A. Sahai, Exchange Act Rel. 55046 (January 5, 2007)

Review of NASD disciplinary action
Days between appeal and decision – 9 months, 29 days
Days between last brief and decision – 6 months, 2 days
Pages – 8

Comment

This is a routine appeal construing NASD Sanction Guidelines. The Commission had earlier heard an appeal of this matter and remanded it to NASD for reconsideration of the sanction. NASD Sanction Guidelines distinguish between failure to respond "in any manner" and other failure to respond timely or completely. The Commission reduced Respondents' bar to a two year suspension, finding he had partially complied with the NASD request and imposed a $5,000 fine. While it explained the reasoning for imposing the suspension, the explanation for imposing the fine was somewhat conclusory. The Commission has faced difficulty in recent years in connection with its explanations for its sanctioning decisions. See, for example a case I handled at the trial level, e.g., The Rockies Fund, Inc. v. SEC, 428 F.3d 1088 (D.C. Cir. 2005) ("Accordingly, because the SEC did not explain its reasoning, we hold that the SEC arbitrarily and capriciously imposed third-tier sanctions on the petitioners.")

This case illustrates two recurring issues with SEC opinions. First, this was a routine matter involving basic interpretation of the NASD's Sanctions Guidelines. Yet the decision took almost 10 months. Second, despite criticism noted above, there is only limited explanation of why the Commission chose the amount of the fine.

Key points

• "[NASD] Rule 8210 is an essential tool for NASD's enforcement responsibilities . . . . "
• "[R]ecipients of requests under Rule 8210 must respond to the requests or explain why they cannot and may not set conditions for their compliance." (fn omitted)
• The NASD is not required to justify its information request.
• When a Respondent fails to produce information he has a duty to explain that inability. Stating that a complete search has been made is an insufficient explanation and the details of the search should be explained.
• The NASD is not a state actor and is not subject to the Eighth and Fourteenth Amendment prohibitions against discriminatory prosecution.
• Respondent alleging discriminatory prosecution has the burden of producing evidence to support such claims.

Summary

Respondent was barred from all NASD association (on remand from the Commission) for violation of NASD Rule 8210 which requires associated persons to provide information to NASD in NASD investigations.

Respondent was associated worked out of his home and was associated with a NASD member in 1999 and 2000. The NASD investigation began in 2001 and concerned customer complaints about forged transactions, unauthorized transactions, and undisclosed outside business activities.

Respondent testified before the NASD staff who then sent respondent a written request to provide certain information and documents. Although he eventually provided some of the requested information after some delay and several NASD follow-up requests, ultimately, Respondent was unable to provide information to the NASD about the whereabouts of two of his former staff who he claimed might have been responsible for the allegedly forged documents. He claimed that due to computer malfunction, his computer based address book records were no longer available. Respondent's lawyer testified that Respondent had no other current records of the whereabouts of those employees.

NASD Sanction Guidelines provide different sanctions depending on whether the respondent has failed "in any manner " to respond or whether there is mitigation or the person did not respond in a timely manner. In the first instance the guidelines provide for up to a bar and $50,000 fine. In the second the maximum guideline penalty is a two year suspension and a $25,000 fine.

Here the NASD contended that respondent failed to respond in any manner. The Commission agreed that Respondent had failed to respond to two NASD requests for information. It found that he partially responded to five NASD staff requests. Further, the Commission found Respondent's explanation for failing to produce, stating only that he had searched his files and not found the information was inadequate. It held that he should have identified which files he actually reviewed and should have contacted his accountant to attempt to find the missing information.

The Commission held that under these circumstances it was not appropriate to conclude that Respondent had not responded "in any manner." Therefore, a bar was excessive under the NASD's Sanction Guidelines. The Commission found that Respondent should be sanctioned at the high end of the Sanction Guidelines, and therefore suspended him for the maximum two years provided for persons who partially respond. Further, the Commission imposed a $5,000 fine.

The Commission's only explanation for the imposition of the $5,000 fine was as follows, "because [Respondent] is no longer subject to a bar, we find it appropriate to impose the $5,000 fine identified by NASD as appropriate for the unauthorized transactions but not imposed."

The Commission also found lacking Corespondents' argument that the bar was a violation of the Eighth and Fourteenth Amendments to the Constitution. It ruled that those Amendments do not apply to the NASD because it is a private actor. The fact that The Exchange Act authorizes it to discipline members does not convert it into a state actor. Perpetual Securities, Inc. v. Tang, 290 F.3d 132 (2d Cir. 2002); Desiderio v. NASD, 191 F.3d 198 (2d Cir. 1999).

The Commission rejected Respondent's claim he was subject to selective prosecution because of his race. The Commission found that he had not met his burden of producing evidence to support this claim.