In one of the few memorable scenes in Godfather III, Michael Corleone laments his inability to break free of the gangster life: “Just when I thought I was out, they pulled me back in.” Some subjects of NASD disciplinary actions know that sort of relentless tug all too well.
Consider the matter of Department of Enforcement v. Brad A. Roethlisberger. A NASD hearing panel found the rep in violation of Regulation T, when he miscalculated the amount of cash he had available during a five-day trading binge in July 1998 and proceeded to make trades that he couldn't pay for, forcing the firm to back him.
The relevant parties all moved promptly to penalize the rep. The firm placed him on administrative leave, suspended him for 90 days without pay and required him to complete remedial training before reinstatement. NASD's department of enforcement (DOE) recommended the rep be suspended for six months, fined $20,000 and required to re-qualify before reentry. But the NASD hearing panel, treating the trading as an isolated violation that caused no losses for the B/D or its customers, decided on less severe punishment: suspension of one month, a fine of $1,000, a requalification requirement and administrative penalties of $2,457.94.
On and On
It would stand to reason that after a full NASD hearing, the panel's ruling would mark the end of this episode, but no.
The department of enforcement appealed the sanctions to the NASD's national adjudicatory council (NAC), which found “very little basis for imposing such lenient sanctions.” Rather than view the five-day trading in the three stocks as a single episode, the NAC chose to classify each transaction as a separate violation. In addition, the NAC cancelled any credit for time served during the in-house suspension and increased the fine from $1,000 to $5,000.
In another recent case, the matter of Department of Enforcement v. Chris Dinh Hartley, a hearing panel found the rep engaged in a prohibited private securities transaction when offering and selling promissory notes to five customers without prior approval from his employer. Hartley was fined $7,500, suspended in all capacities for 30 calendar days and charged $2,059.86 in administrative costs.
Of its own volition, the NAC decided to examine the sanctions, and after conceding that this was “not an egregious case,” increased the suspension to 90 calendar days. It also recommended that Hartley be fined $10,000 and suspended for four months.
Pressure Points
Given the current regulatory climate, the fact that enforcement agencies are making a point of turning the screws on violators comes as little surprise. However, that doesn't mean it's right.
In Roethlisberger, DOE requested six times the suspension term awarded after a full hearing and 20 times the fine awarded at trial. In Dinh, DOE sought four times the term of suspension and a one-third larger fine.
This practice of regularly seeking suspensions and fines larger than those awarded after a trial damages the integrity of the system by forcing reps to settle allegations out of sheer terror that the consequences of a hearing could be far worse. Further, it often compels them to go to trial without the financial capacity to retain legal counsel.
Regulatory sanctions should be fair and reasonable responses to the misconduct alleged, not brass-knuckle, knee-jerk reactions with political motives. Excessive DOE settlement demands or requests for sanctions at trial clog up the SRO's docket and needlessly divert limited prosecutorial and adjudicatory resources. Worse, it calls into question an entire stage of the regulatory process.
For what it's worth, there is a way out of this: Pass a simple rule at NASD requiring that every hearing panel decision set forth the sanctions sought by DOE at the opening of the trial. Give all respondents an on-the-record opportunity to accept the fines/suspensions asked for. If the hearing panel renders a decision imposing sanctions less severe than those sought by DOE, then the NAC should be precluded from imposing sanctions more severe than those rendered by the hearing panel. This approach would ensure that DOE seeks fair and reasonable sanctions, would promote a healthier atmosphere during pre-trial negotiations and would ultimately implement a much-needed check and balance.
By letting rogue reps pay for their indiscretions promptly, it might even give them a chance to make a new life for themselves in the business.
Writer's BIO:
Bill Singer is a partner with the law firm of Gusrae, Kaplan & Bruno.
rrbdlaw.com
