|
2004
CASE ANALYSIS
In the
Matter of the Application of Toni Valentino for Review of Action Taken by NASD
Securities Exchange Act of 1934 Release No. 49255, February 13, 2004
http://sec.gov/litigation/opinions/34-49255.htm
Toni Valentino, formerly associated as a general securities representative with Gruntal & Co., L.L.C. ("Gruntal"), an NASD member firm, appeals from NASD finding she violated NASD Procedural Rule 8210 by failing to appear for two on-the-record interviews (“OTRs”) requested by NASD staff. NASD barred Valentino and assessed costs.
NASD Procedural Rule 8210:
|
In November 2000 NASD was investigating the
private placement and trading of the securities of Pallet Management Systems,
Inc. by D.L. Cromwell Investments, Inc., a member firm. NASD determined that,
while Valentino was associated with Gruntal, one of her brokerage customers had
purchased 185,000 units of Pallet from Cromwell in a private placement and later
sold 160,800 of these units back to Cromwell. In addition, NASD determined that
Valentino's husband, Lloyd Beirne, (the subject of an NASD investigation and a
federal criminal grand jury investigation) served as president and partial owner
of Cromwell. Pursuant to NASD Procedural Rule 8210, the Staff attempted to take
Valentino's on-the-record testimony (OTR). The history of the NASD’s
efforts to schedule Valentino’s OTRs, her response thereto, and the attendant
circumstances are set forth in the following table to:
NASD
Action |
Valentino Action |
||
Date |
Purpose |
Date |
Explanation |
Letter of November 30, 2000 |
OTR
for January 4, 2001 at |
Herbert
Jacobi, Esq. seeks delay for Valentino’s daughters
ear surgery on January 3, 2001 |
|
Letter of December 13, 2000 |
OTR
reschedule to January 24, 2001. |
||
Jacobi
fax of January 12, 2001 |
Surgery
rescheduled for January 16. Seeks OTR in |
||
Jacobi
phone call of January 19, 2001 |
Surgery
postponed until March. |
||
Fax of January 19, 2001 |
OTR
to occur January 24, 2001 in |
||
Jacobi
fax of January 22, 2001 |
Valentino
unwilling to travel while daughter being tested. |
||
Fax |
Provide
dates between January 25, and February 21, 2001 |
Jacobi
agrees to February 20, 2001 in |
|
NASD
insists upon OTR in |
|||
Jacobi
fax of February 12, 2001 |
"My
client has concluded that her maternal obligations to her infant child far
outweigh NASD Procedural Rule 8210(1)." Will only do the OTR on
February 20th in |
||
Fax of February 20, 2001 |
By
February 23, provide five dates between March 12 and April 6 for Florida
OTR. |
||
Letter of May 9, 2001 |
(no
prior response from Valentino) June 28 OTR at its |
||
Jacobi
fax of June 18, 2001 |
Jacobi
has scheduling conflict for
June 28. |
||
Fax of July 6, 2001 |
By
July 13, Jacobi must select at least three days for Washington
OTR. |
||
Russo
Letter of July 17, 2001 |
Martin
Russo, an attorney representing Valentino's husband, wrote to NASD to
explain, among other things, that Jacobi had been named in a criminal
complaint and therefore would not be able to continue to represent her.
Russo stated that Valentino would contact NASD when she had retained new
legal counsel. Russo also stated that Valentino would not be
available for an interview during the first two weeks of August. |
||
Letter of August 13, 2001 |
OTR
August 28, 2001 in |
||
August
24, 2001 |
New
lawyer Adam Mitzner informed NASD that he could not make the August 28
interview date, because he would be on vacation.
He explained that he needed time to familiarize himself with Valentino's
case and would contact NASD shortly after his return from vacation,
September 6. |
||
Mitzner
phone call of September 21, 2001 |
Mitnzer
says Valentino not willing to fly to |
||
October 9, 2001 |
Provides
five days in October for OTR in |
||
Mitzner
Fax of October 12, 2001 |
Valentino
would not attend the October 25 interview because of her September 11
fears as well as the fact that "Ms. Valentino is the primary care
giver to her two young children and it is very difficult for her to leave
the |
||
Letter of October 18, 2001 |
OTR
relocated to |
||
Mitzner
telephone call of October 19, 2001/ confirmed by fax of October 22 |
Valentino
would not appear for the October 25 interview in |
||
October 23, 2001 |
No
adjournment |
||
October
25, 2001 |
Valentino
fails to appear in |
||
October 26, 2001 |
NASD
served Valentino with a Notice of Intent to Suspend under NASD Procedural
Rule 9541(b) for her refusal to attend two on-the-record interviews in
violation of Procedural Rule 8210. She was subsequently barred
and costs of the proceeding assessed. |
How serious is a
violation of NASD Rule 8210?
The NASD and SEC deem it
critical that members and associated persons timely cooperate with
investigations. Failure to timely cooperate or to cooperate at all often
carries severe penalties. For example, NASD Sanction Guidelines with
respect to NASD Procedural Rule 8210 violations provide that a bar should be the
standard sanction when an individual fails to respond in any manner to requests
for information.
What if there are
mitigating factors?
Even where mitigation
exists, the NASD Sanction Guidelines still allow for the imposition of a
suspension in any or all capacities for up to two years.
Given the
explanations Valentino raised --- her daughter’s medical condition, September
11th, her husband’s criminal problems, her first lawyer’s
indictment --- why didn’t the SEC reduce the bar?
The SEC frequently
espouses the position that members and associated persons may not impose
conditions, such as the location of an interview, under which they will respond
to NASD requests for information.
·
Joseph Patrick
Hannan, 53 S.E.C. 854, 859 (1998)
(finding applicant could not impose conditions on NASD's requests for
information and rejecting applicant's contention that he could not appear in
"downtown Los Angeles" for a deposition because he had no accrued
leave).
·
Brian Prendergast,
Securities Exchange Act Rel. No. 44632 (August 1, 2001), 75 SEC Docket 1525,
1541 (rejecting
respondent's claim that he could refuse to testify in order to deprive potential
litigants of the interview transcript);
·
Michael J.
Markowski, Exchange Act Rel. No. 43259 (Sept. 7, 2000), 73 SEC Docket 625, 632,
aff'd, 274 F.3d 525 (D.C. Cir. 2001), cert. denied, 537
·
Richard J. Rouse,
51 S.E.C. 581, 585-86 (1993)
(finding that "members cannot be permitted to impose conditions on
compliance with NASD information request”)
The NASD has a regrettable tendency to impose unfair
conditions upon the conduct of Rule 8210 OTRs. In recent years, NASD
has engaged in what I view as inappropriate, heavy-handed efforts to force
witnesses to travel at their own expense to remote locations for OTRs when
there are closer NASD District Offices. Moreover, NASD refuses to
pay for such travel despite the fact that the SEC is obligated as a matter
of law to offer reimbursement or advance the costs --- as is virtually
every state and federal prosecutor and civil litigant. In 2003 a
group of NASD Dissidents promulgated a Statement of Principles seeking
various reforms. Among one of the issues raised
was:
We
call for the uniform codification of many investigation/examination
practices by NASD staff that we find are arbitrary and capricious.
·
Uniformity.
Towards achieving that goal we would require a uniform form for the transmission
of notices of investigations/examination.
Said forms should not vary from District to District and Examiner
to Examiner, but should model themselves upon other standard notices,
e.g., SEC Forms 1661 and 1662. Said
forms should include, at a minimum, a precise Fifth Amendment statement
that NASD does not recognize this privilege, a warning as to the
consequences of not appearing or refusing to cooperate, and a clear
statement of the right to retain independent legal counsel.
·
Bill of Rights.
We would promulgate an NASD
Bill of Rights to be observed during investigations/examinations for
member firms and their registered persons.
Among the practices we will seek to codify are acceptable protocols
for scheduling and conducting on-the-record (OTR) interviews.
We will pointedly seek the creation of an impartial arbiter to
resolve OTR disputes that arise between witnesses and staff.
Similarly, we will insist upon the codification of fair practices
for requesting the physical appearance of a witness.
Notably we will seek to require that OTRs be held at o
an NASD office within state
where RR presently resides, or o
is presently employed, or o where mutually acceptable. http://www.securitiesindustrycommentator.com/NDGMVote/NDGMPlatform.htm Thankfully, NASD agreed to implement the "Uniformity" request and we are now seeing the use at some Districts of a standard notice accompanying many Rule 8210 demands. Unfortunately, NASD has not addressed the complaints about forced travel and has not seen fit to issue a Notice to Members seeking comment on this issue. For a detailed examination of a case in which forced travel was an issue, visit http://www.securitiesindustrycommentator.com/2001/Q1/NASDOTR.htm. Also see an article in Registered Rep. magazine: http://registeredrep.com/ar/finance_no_free_ride/index.htm |
The SEC has held that
family health concerns do not mitigate a failure to respond to NASD requests
pursuant to Rule 8210 where the failure continues over a protracted period of
time. See John A. Malach, 51 S.E.C. 618, 620 (1993) (finding
unsubstantiated "personal problems" do not excuse respondent's failure
to furnish information to NASD over the course of a two-year period).
Here, the SEC did not believe that the record indicated Valentino's
daughter's condition was so serious that Valentino could not travel to
The SEC frequently warns
that reliance on counsel does not excuse an associated person's obligation to
supply information or testimony or otherwise cooperate with NASD investigations.
Joseph G. Chiulli, Exchange Act Rel. No. 42359 (Jan. 28, 2000), 71 SEC Docket
1544, 1553. See also Saundra Escott-Russell, Exchange Act Rel. No. 43363
(Sept. 19, 2000), 73 SEC Docket 1265, 1270 (finding that respondent
"was not relieved of her obligation to respond to NASD's requests by her
lawyer's advice"). A claim of
reliance on counsel must be predicated on a showing that Valentino made complete
disclosure to counsel, sought advice on the legality of her proposed conduct,
received advice that her proposed conduct was legal, and relied in good faith on
counsel's advice. SEC v.
The Verdict
The SEC sustained the NASD's findings of violations of NASD Procedural Rule 8210 and the sanctions of a bar with costs.
|