NASD JURISDICTION:
WHEN THE TWO YEARS STARTS RUNNING

Background

Eliezer Gurfel (Gurfel) entered the securities industry in 1985 and in July 1992 became a general securities representative of International Money Management Group, Inc. (IMMG). Gurfel worked out of his home and under an agreement with IMMG, Gurfel received 85% of the commissions he generated, and IMMG retained the remaining 15%.

Between January 12 and March 2, 1993, the insurance company ITT-Hartford issued four checks totalling $9,625,64 to IMMG for commissions that Gurfel generated from a variable annuity product. Although the checks were made payable to the order of "International Money Management," they were sent to Gurfel at his home.

After a routine review of its accounts receivable, IMMG discovered that it had not received the four commission checks from ITT-Hartford and determined that someone had signed the name of IMMG’s president on the backs of the checks and deposited them into Gurfel’s bank account. IMMG’s president testified that ITT-Hartford typically would send commission checks directly to the firm, which would then negotiate the checks and distribute the commissions to its registered representatives. IMMG’s president testified that he did not know why the four commission checks were not handled in this manner. IMMG’s president testified that when confronted, Gurfel admitted that he forged the president’s signature on the checks and deposited the proceeds into his own account. Gurfel repaid IMMG its $1,450 share of the commissions.

In a letter to NASD staff, Gurfel’s attorney asserted that Gurfel’s receipt of the commission checks was a "mistake." Counsel explained that Gurfel had been receiving approximately ten to fifteen checks per month (made payable to him) from other insurance companies for business unrelated to his association with IMMG. Gurfel expected that ITT-Hartford would send the commission checks directly to IMMG and did not realize that the four checks from ITT-Hartford (made payable to IMMG) were for commissions that he was obligated to share with the firm. Counsel suggested that Gurfel's long-standing relationship with ITT-Hartford and the latter's relative inexperience with IMMG may have resulted in the inadvertent forwarding of the checks.

Gurfel was terminated by IMMG on November 15, 1993. After leaving IMMG, Gurfel worked as a registered representative for NASD member firm Van Sant and Mewshaw Securities, Inc. (Van Sant). Gurfel’s employment with Van Sant ended on October 31, 1994. Gurfel has not been associated with any NASD member firm since.

NASD COMPLAINT

On November 30, 1995, the NASD’s District Business Conduct Committee (DBCC) filed a complaint against Gurfel, alleging that he violated Conduct Rule 2110 by forging or causing to be forged the endorsement of the president of IMMG on the four ITT-Hartford commission checks and by converting the proceeds to his own use. In his answer, Gurfel admitted that he deposited the four checks into his bank account, but denied that he forged any signatures, and asserted that he promptly made full restitution to IMMG for its share of the commissions. Gurfel also argued that the NASD lacked jurisdiction, contending that, since the complaint against him was filed more than two years after his employment with IMMG had ended, under Article IV, Section 4(a), of the NASD By-Laws, it was untimely.

A special hearing subcommittee of the DBCC met to consider Gurfel’s jurisdictional challenge. The subcommittee rejected the challenge and set a hearing date before the DBCC. Gurfel waived a hearing, but the DBCC decided to hold a hearing "because there were a number of disputed factual issues." Gurfel’s attorney then informed the DBCC that Gurfel would not participate in the hearing. The DBCC proceeded with the hearing after informing Gurfel of its intention to do so.

At the DBCC hearing, the NASD introduced into evidence the four commission checks issued by ITT-Hartford. The president of IMMG was the sole witness before the DBCC. The DBCC determined that the evidence supported the allegations set forth in the complaint. The DBCC censured and barred Gurfel from associating with an NASD member in any capacity. The DBCC declined to impose any monetary sanctions in light of Gurfel’s filing for personal bankruptcy during the pendency of these proceedings.

Gurfel appealed the DBCC’s decision to the NASD’s National Adjudicatory Council (NAC). The NAC affirmed the DBCC’s finding of jurisdiction, holding that the complaint was filed within two years after Gurfel’s last association with any NASD member firm, and sustained the disciplinary action against him. Gurfel now seeks review.

JURISDICTION

NASD Article IV, Section 4, of the NASD By-Laws [in January 1998, Article IV was redesignated Article V, and Section 4 was redesignated without substantive change under Article V] provides , in pertinent part:

A person whose association with a member has been terminated and is no longer associated with any member of the Corporation or a person whose registration has been revoked . . . shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination or revocation. . ., but any such complaint shall be filed within: two (2) years after the effective date of termination of registration pursuant to Section 3 above. . . .

Section 3 requires an NASD member firm to notify the NASD of the termination of an associated person’s registration by filing a Form U-5 or Uniform Termination Notice for Securities Industry Registration within thirty days of the termination.

Gurfel’s employment with IMMG ended on November 15, 1993. Consequently, he argued that his termination date from IMMG started a two-year clock (which expired on November 15, 1995) on the NASD's ability to assert its jurisdiction over him for the forgery violations at IMMG. If Gurfel's argument prevails, then the NASD filed its November 30, 1995 complaint 15 days too late.

The NASD argued that notwithstanding Gurfel's November 15, 1993 termination from IMMG, he subsequently obtained registration with another NASD member. The NASD claimed that the two-year clock only began to run on October 31, 1994, when Gurfel was terminated without obtaining subsequent association with another member. Consequently, the NASD's position is that Gurfel's association with the NASD terminated on October 31, 1994 and continued uninterrupted. Conceivably, the NASD would have deemed it necessary to assert jurisdiction over Gurfel by October 31, 1996.

The SEC decided that Section 4(a) governs the retention of jurisdiction over a person who "has been terminated and is no longer associated with any member." The provision gives the NASD jurisdiction until "two years after the effective date of termination of registration." As a textual matter, the "termination" to which this phrase must refer is the termination that results in no association with any member; no other "termination" is mentioned in the by-law. Consequently, the SEC found that the two-year period began to run on October 31, 1994, the Van Sant termination date.

FORGERY

The SEC sustained the NASD's finding that Gurfel violated NASD Conduct Rule 2110 by forging or causing to be forged the endorsement of IMMG’s president on the backs of the commission checks and converting the proceeds from the checks to his own use. The SEC noted that Gurfel admitted receiving the commission checks and wrongfully depositing them into his bank account; notwithstanding that he denied forging any signatures and offered no explanation as to how the president's alleged endorsement became affixed. IMMG's president testified that when he confronted Gurfel, the employee apologized for depositing the checks into his own bank account, admitted signing the president’s name on the backs of the checks, and agreed to make full restitution to IMMG. Gurfel concedes that this conversation took place, but denies that he confessed to forgery.

SANCTIONS

Gurfel challenges the NASD’s sanctions of a Censure and bar as unduly harsh because he has no prior disciplinary record, repaid the commissions to IMMG, and no customer funds were involved. The NASD was unimpressed by Gurfel’s repayment of funds to IMMG, since Gurfel gave back the money only after he was caught, and there was no evidence suggesting Gurfel otherwise would have repaid IMMG. The NASD concluded that Gurfel’s continued participation in the securities industry posed a risk to the public and warranted his exclusion from association with any NASD member firm. The SEC agreed and sustained the sanctions