When conducting a de novo review the SEC does not disregard the findings before it and usually gives considerable weight and deference to the credibilitydeterminations of the initial decision-maker. The reason for this deference is that the initial decision-maker is supposed to make its determinations on the basis of hearing the witnesses’ testimony and observing their demeanor. When the SEC conducts its review, it usually consists of reviewing transcripts of testimony or legal briefs, and does not include live witnesses. So, de novo doesn't really mean that there is a second hearing. Nonetheless, the SEC does not accept the initial decision-maker's determinations blindly. When the record contains substantial evidence questioning the appropriateness of credibility determinations, the SEC is not bound to accept those findings.

The SEC analyzed the record and determined that the MSC relied principally on Lipow’s testimony in making its findings against Schreiber. The SEC particularly noted the MSC's statement that "[t]he Committee believes that Lipow’s testimony generally was credible as it related to the substantial roles played by Schreiber, Cahill and Lipow." Consequently, the SEC considered whether Lipow was a reliable witness.

As an initial matter, the record cast some doubt on the reliability of Lipow’s testimony. The SEC noted that Lipow admitted using drugs during the time of the transactions. But the SEC could not find any reference to this drug use in the MSC's explanation as to why it found Lipow credible. The SEC also was unable to locate in the MSC's record any consideration of the impact such drug use might have had on Lipow’s ability to recollect events. These are two separate and distinct issues: one goes to Lipow's character as a drug user, the other goes to his ability to clearly remember events.

The SEC was further puzzled by the MSC's chairman's observation that Lipow’s "memory seems to increase at certain times during certain questions . . .." Subsequently, that same panelist commented to an NASD staffer that "[a]fter Mr. Lipow’s testimony, I do appreciate Ms. Armour’s exacting testimony, it’s been a pleasure." The SEC was unable reconcile the chairman's criticisms of Lipow's memory and testimony, with the MSC's determination that this same witness was credible.

Similarly, the SEC noted that Schreiber and Lipow exhibited open animosity toward each other at the MSC hearing. Accordingly, the SEC considered Lipow's antagonism towards Schreiber as evidencing possible bias or prejudice. However, the SEC was again frustrated when searching the NASD's record for any discussion of what, if any, consideration was given to Lipow's dislike of Schreiber. The SEC disapprovingly noted that there was no characterization by the MSC of Lipow's demeanor during the hearing.  

The SEC was bothered by the apparent contradiction of the NASD deeming Lipow's testimony credible to implicate Schreiber, but not Hershall Krasnow, whom Lipow stated played a central role in the transactions. Lipow also submitted contemporaneous notes in support of his testimony about Krasnow. Nonetheless, the MSC found that there was "insufficient evidence to implicate Krasnow as a knowing participant in the illegal distribution." The SEC was befuddled by the MSC's decision to deem Lipow's testimony sufficient to implicate Schreiber, but not Krasnow.

The MSC "did not find Schreiber’s denials or his testimony in general to be credible." However, the SEC noted that Schreiber submitted a "sizable number" of affidavits into evidence that corroborated his testimony and contradicted Lipow’s. The NASD staff characterized the affidavits at issue as "extra-record affidavits of peripheral individuals whose hearsay statements prove nothing actually exculpatory, . . . or who, as co-conspirators capable of the most serious frauds, deserve no credence whatsoever . . .." In an apparent slap at the NASD, the SEC pointedly characterized the affidavits and testimony as addressing "key points."

Because the initial fact-finder’s opinion included only general credibility findings and did not discuss the substantial amount of record evidence that appears to contradict its findings, the SEC refused to defer to them. Quite simply, the SEC criticized the NASD's decision for not revealing whether the NASD, in making its findings, took into account all of the evidence that appeared in the record. Further, the SEC seemed particularly annoyed at the NASD's procedural posturing in this case, especially after the MSC hearing and during the subsequent appeals before the National Business Conduct Committee (NBCC) and the SEC. Without any equivocation, the SEC stated that the "NASD had the opportunity to clarify this issue, but did not take it. " Accordingly, the SEC vacated the sanctions imposed and remanded this proceeding to the NASD for explicit discussion of the issues addressed.

For Further Reference:

Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992).[ credibility determinations of the initial decision-maker when such determinations are based on hearing the witnesses’ testimony and observing their demeanor].