1969 Permanent Injunction/Statutory Disqualification

In the late 1960s, Morton Kantrowitz participated in a scheme in which he and others created the false appearance of a market for the stock of American Continental Industries ("ACI"). As a result, various lending institutions were induced to make loans totaling more than $720,000 with ACI stock pledged as collateral for the loans. The loans subsequently defaulted. 

The SEC alleged that the two largest shareholders of ACI stock had contacted registered representatives, including Kantrowitz, and convinced them to insert quotations in the pink sheets, published by the National Quotation Bureau, Inc., with an understanding that the traders would be protected against loss. Kantrowitz, at the time a vice president, director, 30% shareholder, and trader of a broker-dealer, inserted 45 to 50 quotations per day during the relevant time period.

In 1969, without admitting or denying the allegations in the SEC's complaint, Kantrowitz consented to the entry of the permanent injunction prohibiting him from further violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a)(2) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 15c2-7, and, accordingly, became subject to a statutory disqualification.

In 1970, the Commission instituted administrative proceedings arising from the same facts, and found that Kantrowitz aided and abetted a fraudulent scheme by placing fictitious quotations for a stock in the pink sheets. He was suspended for three months. 

STATUTORY DISQUALIFICATION

Under Securities Exchange Act Section 3(a)(39), 15 U.S.C. § 78c(a)(39), a person is subject to a "statutory disqualification" if, among other things, "such person . . . is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), . . . ."

Under NASD By-Laws, Article III, Section 4(h), a person is subject to a "disqualification" if, among other things, such person "is permanently or temporarily enjoined . . . ." 

Under NASD By-Laws, Article II, Section 3(b), the NASD may bar a person from becoming associated or continuing association with a member if such person is subject to a disqualification. 

Under Exchange Act Section 3(a)(39), 15 U.S.C. § 78c(a)(39), and under NASD By-Laws, Article III, Sections 4(g)(1)(i) and (ii), NASD Manual at 1307, a person is subject to a statutory disqualification if, among other things, he or she is convicted of a misdemeanor, within 10 years preceding the filing of any application for membership or association, arising out of the conduct of the business of a broker-dealer or involving the making of a false report.

1971 NASD Approves Return

In 1971, the NASD approved Kantrowitz's application to return to the securities industry. The suspension was completed in 1972. Thereafter, Kantrowitz was associated with a broker-dealer until 1992.

1992 Statutory Disqualification

In 1992, Kantrowitz pled guilty in New York state court to falsifying business records. Kantrowitz admitted that, while employed as a trader for Nash Weiss Securities, a member firm, he agreed to "park" securities for another broker-dealer which ultimately resulted in false entries in that broker-dealer's FOCUS report. Kantrowitz was sentenced to a one-year period of conditional discharge. This conviction ceased to be a statutory disqualification as of October 15, 2002.

In April 2003, the NASD's Department of Member Regulation ("Member Regulation"), recommended denial of the Great Eastern application. Member Regulation found that Kantrowitz had engaged in a pattern of fraudulent conduct and that it was not in the public interest to allow Kantrowitz to associate with Great Eastern in any capacity.

In December 2003, the NASD's National Adjudicatory Council ("NAC") denied Kantrowitz's application to associate with Great Eastern. Before the NAC, the Firm proposed that Craig Felty be Kantrowitz's supervisor. Felty has no disciplinary history and has experience in supervising disqualified persons. The NAC specifically found that the Firm's proposed heightened supervisory structure was "not inadequate." Pointedly, the NAC also stated that it was not troubled by the Firm's regulatory history. In 2002, the Firm consented to a fine of $7,500 in an Acceptance, Waiver and Consent for failing to comply with the reporting requirements of the Order Audit Trail System. In 2003 NASD issued a Letter of Caution to the Firm for failing to submit a copy of a response to an information request.

The NAC observed, based solely on Kantrowitz's commission of the two acts of securities-related misconduct, that Kantrowitz's regulatory history was so grave that he should not be permitted employment in the securities industry. In reaching its determination, the NAC stated that the standards set forth in the Commission decisions in Paul Edward Van Dusen, 47 S.E.C. 668 (1981) and Arthur H. Ross, 50 S.E.C. 1082 (1992) do not apply in determining whether to grant or deny the Firm's application. 

Kantrowitz appealed the denial to the SEC.

The third MC-400 application was filed by Great Eastern (the "Firm") and proposed that Kantrowitz function in the following limited capacity:

1. He will introduce potential customers to the Firm to buy or sell securities for their own accounts solely on an unsolicited basis.

2. All accounts referred to Great Eastern by Kantrowitz would be reviewed by his supervisor. 

3.Although Kantrowitz will be listed on Great Eastern's new account form as the representative who introduced these new accounts, he would not perform any of the duties of a registered representative for the accounts. 

4.Upon acceptance of an account referred to Great Eastern by Kantrowitz, the Firm proposes to assign another qualified registered representative to carry out the duties with respect to the account. 

5. Kantrowitz's sole compensation from Great Eastern would be an override, no more than fifty cents per transaction, of the commissions earned from unsolicited transactions executed by the Firm for the accounts introduced by Kantrowitz. 

6.Kantrowitz would not have authority to hire any person, would not trade a firm proprietary account, and would not handle customer or firm funds or securities.

In reviewing the NASD's denial of Kantrowitz's application, the SEC dramatically foreshadows it's ultimate decision by noting that "because the NAC decision did not follow the standards set forth in Van Dusen and Ross in evaluating the application, we are unable to determine whether NASD applied its rules in a manner consistent with the purposes of the Exchange Act. We thus remand this matter to NASD for further consideration."  

NASD argued that Van Dusen didn't apply to Kantrowitz's because the case applied only to matters in which the SEC imposed a conditional bar (one in which there is a right to reapply granted after the expiration of a specified term) and the application was submitted after the term's expiration. In NASD's view, the Van Dusen analysis does not apply to Kantrowitz's 1969 injunction because it "included no right to reapply after a specified period of time." NASD also contends that the SEC did not weigh the requirements of the public interest, as it had in Van Dusen, when it imposed the three-month suspension on Kantrowitz in the related administrative proceeding.

Is Van Dusen limited to cases where the applicant was subjected to a conditional bar but permitted to reapply after a specific period of time, and that time has expired?

No. The SEC didn't agree with the NASD's analysis of the scope of Van Dusen. In Reuben D. Peters, Exchange Act Rel. No. 51237 (Feb. 22, 2005), the SEC stated that Van Dusen extends to the application of a statutorily disqualified person who was also the subject of SEC administrative sanctions imposed under the Exchange Act. Under that more expansive standard, Kantrowitz would be covered.  For a detailed analysis of Peters visit http://rrbdlaw.com/2004/0406peters.htm

Does Van Dusen require the NASD to automatically approve an application for reentry upon the expiration of a conditional bar?

No. The SEC noted that even with a conditional bar, an applicant's reentry is not "automatic" after the expiration of a given time period. Van Dusen instructs the NASD to consider other factors, such as, "other misconduct in which the applicant may have engaged, the nature and disciplinary history of the prospective employer, and the supervision to be accorded the applicant." Also, Ross states that if an applicant had engaged in additional misconduct which was similar to the misconduct underlying a bar order in which the time prohibiting application had passed, it is appropriate to consider both instances of misconduct "as forming a significant pattern" which might justify the denial of an application.

Was the NASD correct that the SEC didn't consider the "public interest" when suspending Kantrowitz?

No (and what was the NASD thinking when it made such comment --- akin to a slap in the SEC's face). Somewhat defensively, the SEC explained that its authority to impose any sanction pursuant to Exchange Act Section 15 requires that it make a public interest finding. More to the point, the SEC specifically noted that "the law judge engaged in a lengthy analysis of the public interest in suspending Kantrowitz." 

The Van Dusen and Ross Standards

These two cases hold that membership continuance or MC-400 applications must be granted absent other acts of misconduct or circumstances of record bearing adversely on a member firm's or individual's fitness to continue in the securities industry. Accordingly, an NASD inquiry must focus on any "other [intervening] misconduct in which the applicant may have engaged, the nature and disciplinary history of a prospective employer, and the supervision to be accorded the applicant." 

Van Dusen provides that 

1. where the time period specified in a conditional bar order has expired; 

and

2. where no "new information" or additional misconduct has been raised,

it is inconsistent with the remedial purposes of the Exchange Act to deny an application for reentry.