the Matter of the Application of ANTHONY
H. BARKATE For
Review of Disciplinary Action Taken by NASD
Anthony H. "Andy" Barkate, formerly a general securities principal
with Securities Service Network, Inc. ("SSN"), a member of NASD, appeals
from NASD disciplinary action. NASD found that Barkate failed to inform
SSN of approximately 93 private securities transactions, in which he sold
$6.8 million worth of instruments and received $400,144 in selling
compensation from an outside source. The investors to whom Barkate sold those instruments incurred
substantial losses. Barkate has admitted violating NASD Conduct Rule 3040
but on appeal to the SEC contends that the bar imposed by the NASD is excessive
in light of certain factors that, he contends, mitigate his actions.
From June 1996 until sometime in 2002, Barkate was the president
and the general securities principal of former NASD member firm California
Financial Network, Inc. ("CFN"). From June 1997 to April 1999, Barkate was
also associated with SSN as a general securities
On September 4, 1997, Barkate executed a registered representative
agreement with SSN authorizing him to operate his CFN office as an office
of supervisory jurisdiction ("OSJ") for SSN. The agreement expressly
prohibited Barkate from offering or selling any security to any purchaser
without the written approval of SSN, and required him to disclose in
writing to SSN all his sources of outside income. On September 18, 1997,
Barkate sent to SSN an outside business activity disclosure form
disclosing his outside insurance and advisory activities, which were
subsequently approved by SSN. Barkate also received a copy of SSN's compliance and operations
manual, which specifically prohibited the receipt of commissions from any
source other than SSN in connection with any transaction without SSN's
prior written consent: "[t]here are products represented as
'non-securities' that in fact are really 'non-registered securities' in
violation of state and/or regulatory requirements. . . . If there is any
doubt at all, please contact the Home Office promptly."
The Financial Instruments at Issue
Around March 1998, an acquaintance of Barkate introduced him to the financial instruments offered by TLC Investments & Trade Co. ("TLC").
In May 1998, Barkate attended an annual SSN compliance seminar conducted by Darla Goodrich, the head of SSN's compliance department, during which she discussed SSN's prohibition against selling away and private securities transactions. Goodrich testified that she was particularly vocal about SSN's policy against selling away, and communicated that prohibition to SSN representatives through newsletters, notifications, memoranda, compliance letters, and seminars. In her view, it was "common knowledge" among SSN representatives that no one was permitted to sell any product without prior written notice to SSN and without SSN's approval.
On June 11, 1998, Barkate received another compliance
presentation as part of SSN's routine annual audit of his OSJ. Barkate did
not mention TLC instruments to SSN officials on either
From July 1, 1998 through March 29, 1999, Barkate sold instruments of TLC and its related entities. At least one-third of the approximately 93 customers to whom Barkate sold the TLC instruments were SSN clients, and he used SSN facilities for his activities. Barkate testified that the TLC instruments were extremely important to him because he derived approximately 50% of his income from their sale. The TLC instruments included a promissory note identifying, among other things, the dollar amount and terms of the investment, and a separate investment agreement. The TLC promissory notes and investment agreements purportedly provided investors with tax lien certificates that represented the right to collect delinquent taxes on real property. TLC represented that these instruments would be secured by an interest in real property, which would be held by the investor and TLC as tenants-in-common. For a minimum $20,000 investment, TLC would guarantee a 10-12% annual rate of return to the investor. These representations were unfounded, for TLC was engaged in a nationwide Ponzi scheme.
On October 30, 2000, the United States District Court for the Central District of California issued an injunction against TLC and appointed a permanent receiver for TLC.
How the BD Learned of the Activity
On March 31, 1999, Barkate submitted a proposed CFN website to SSN for approval. The website advertised "10 to 12% 1 Year Guaranteed Tax Lien Certificates" and described a tax lien certificate as an "investment." The website claimed "Securities offered through Security Service Network, Inc. Member NASD/SIPC." When David Bellaire, SSN's in-house counsel, saw the proposed website, he searched Barkate's SSN file for information about the tax lien certificates because he feared they might be fraudulent. Bellaire testified that he was unable to find any disclosure of Barkate's involvement with TLC in the file. On April 1, 1999, SSN sent Bellaire to Barkate's SSN branch office to conduct an unannounced audit. During the audit, Bellaire found TLC sales awards, TLC brochures, and files relating to TLC sales in Barkate's office. Bellaire testified that Barkate admitted that he had not disclosed his TLC involvement to SSN and had failed to discuss the tax lien certificates with SSN's compliance department because he was concerned that SSN would not approve the activity. During the audit, no one at CFN provided Bellaire with any documents disclosing Barkate's TLC activities, nor did anyone claim that notice of Barkate's involvement with TLC had previously been provided to SSN. Within 10 days after the surprise audit, Barkate provided SSN with three forms disclosing his and two subordinates' TLC activities. On April 1, 1999, after Bellaire concluded his unannounced audit, SSN ordered Barkate to "cease and desist" from selling the TLC instruments and subsequently terminated his employment on April 12, 1999.
Barkate created the impression that SSN sanctioned the sale of TLC instruments because he
Barkate, however, asserts that several factors mitigate his conduct. Although he stipulated during the NASD hearing that the TLC instruments that he sold were securities; on appeal to the SEC he asserted that he reasonably believed that the TLC instruments were not securities.
Barkate received the SSN compliance and operations manual which
warned against selling away, noted that instruments that did not appear to
be securities could be, and directed each registered representative to
contact SSN before selling any instrument not approved by SSN. If Barkate
had any doubt as to the status of the promissory notes, he could have
contacted SSN's compliance department. Barkate admitted that he never
consulted SSN regarding the status of the TLC
Barkate also claims that he relied on a legal opinion prepared by
TLC outside counsel declaring that the TLC instruments were not
securities. However, TLC's outside counsel represented TLC, not
Barkate. The SEC warns that a registered representative cannot rely
on issuer's counsel to determine whether or not an instrument is a
Barkate claims that he provided written disclosure of his TLC involvement to SSN on August 21, 1998, in accordance with NASD Conduct Rule 3030. Barkate insists that he submitted an outside business form to SSN, along with supporting materials, notifying SSN of his TLC activities, and that the packing slip relating to that package shows the listing for the outside business disclosure form checked off as received by SSN. Barkate admitted that he did not update his Form U-4 to reflect his outside business activities with TLC.
The record supports NASD's finding that SSN did not receive Barkate's disclosure form in August 1998. Bellaire testified that Barkate did not disclose to SSN any association with TLC through an outside business disclosure form until several days after Bellaire's surprise audit of Barkate's SSN branch office. When Bellaire saw Barkate's proposed website on March 31, 1999, Bellaire immediately checked Barkate's file at SSN but did not find any disclosure of Barkate's TLC involvement, which would have been documented in that file. Bellaire testified that, during his unannounced audit, neither Barkate nor any CFN employee provided him with any documents disclosing Barkate's TLC involvement. Goodrich, head of SSN's compliance department during the relevant period, testified that she did not recall receiving any disclosure form from Barkate relating to TLC. Jeffrey Currey, an SSN compliance manager, testified that he did not recall receiving any disclosure forms from Barkate regarding TLC, tax liens, or promissory notes. While Barkate notes that he and two CFN employees, Cassandra Woodward and Dianna Jones, testified that a package containing the disclosure form was mailed on August 21, 1998, the NASD Hearing Panel credited the testimony of Bellaire, Goodrich, and Currey. The Hearing Panel determined that Barkate did not file the disclosure form as he claimed. The Hearing Panel also found that, in the NASD proceeding, Barkate fabricated an exhibit purportedly containing the disclosure form and TLC documents that Barkate allegedly sent to SSN on August 21, 1998.
Barkate claims that the majority of his TLC customers remain his
customers and, to date, have recouped some of their investments from the
TLC receiver. Under questioning by the Hearing Panel, however, Barkate
recanted his estimate that investors were receiving 50% of the funds they
invested and admitted that they were recouping less than 14%. In addition,
Barkate admitted that he had been the subject of several lawsuits stemming
from his sale of the TLC instruments.
The SEC concluded that none of the factors argued by Barkate mitigated his conduct. Worse, the SEC agreed with NASD that other factors increase the seriousness of conduct. These aggravating factors included
Ultimately, the SEC found that Barkate used SSN facilities to sell TLC instruments (often to SSN customers), engaged in private securities transactions without SSN's prior knowledge or approval, and participated in such transactions even though he knew that SSN prohibited all selling away. He personally engaged in numerous sales that resulted in substantial commissions to him and substantial losses to his customers. The SEC reiterated that if views selling away as a serious violation, and NASD Conduct Rule 3040 is designed not only to protect investors from unmonitored sales, but also to protect securities firms from loss and liability in connection with sales made by persons associated with them. Such misconduct deprives investors of a brokerage firm's oversight, due diligence, and supervision, protections investors have a right to expect.
SEC sustained NASD's imposition of a bar and costs.