NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

SECURITIES INDUSTRY COMMENTATORô
2005
CASE ANALYSIS

By Bill Singer

In the Matter of the Application of Rooney A. Sahai
For Review of Disciplinary Action Taken by NASD  

Securities Exchange Act of 1934 Release No. 51549, April 15, 2005
http://sec.gov/litigation/opinions/34-51549.htm

2007 UPDATE:  Pursuant to an SEC Decision (Securities Exchange Act Release # 55046 / January 5, 2007), the SEC only partially sustained the NASD's sanctions.  Specifically, the SEC set aside the Bar from association with any NASD member in all capacities imposed by NASD and reduced that proposed sanction to a two-year suspension  in all capacities.  The SEC also imposed a fine of $5,000.

Background

Rooney A. Sahai entered the securities industry in 1986, and became associated with The Key Group, Inc. ("Key Group") in 1999, during which time he worked out of his home.  In 1999 and 2000, Sahai was registered with Key Group as a limited representative - investment company and variable contracts products representative.

Customer Malcolm Coblentz

In 1998 or early 1999, Malcolm Coblentz, a physician, purchased health insurance from Sahai. Thereafter, Sahai visited Coblentz's office from time to time to discuss various investment products. In November 1999, Coblentz's medical malpractice provider, Medical International Insurance Exchange of New Jersey ("MIIX"), went public, and he received a stock certificate worth approximately $30,000.  On December 3, 1999, Coblentz and his wife met with Sahai, and the doctor requested that Sahai liquidate the MIIX stock and use the proceeds to establish an IRA account. Coblentz agreed with Sahai's recommendation that the stock certificate proceeds be invested in American Skandia mutual funds. 

The MIIX certificate was transferred to Bear Stearns, Key Group's clearing firm, and sold on December 16, 1999. By that time, its value had dropped $2,000. Coblentz testified that, in January 2000, he became concerned about the delays in liquidating the stock certificate and investing the proceeds at American Skandia. Coblentz's wife telephoned Bear Stearns to inquire about the delay and was informed that the firm had waited until Coblentz had signed and returned to Bear Stearns an IRS Form W-9, which had been sent to Sahai. The proceeds were held in a Key Group account at Bear Stearns and subsequently invested in an American Skandia account on January 11, 2000. 

Coblentz didn't recall signing a Form W-9, and requested that Bear Stearns telefax to him a copy. Coblentz stated that the signature on the form was not his and that he neither instructed nor authorized anyone to sign the form for him

Subsequently, he telephoned Sahai's office and requested that Deepa Patel, an administrative employee in Sahai's office, send him the documentation in his file. He received from Sahai's office a handwritten note stating, "Please invest the entire proceeds in my account at American Skandia. Thank you." ("Note One"). Coblentz admitted that his signature appears on Note One. At Sahai's request, he signed his name in the middle of a blank sheet of paper because he understood that Sahai would draft language reflecting Coblentz's "permission to transfer the stock document to American Skandia." Coblentz agreed that, although not in his handwriting, the text of Note One accurately reflected his investment intentions and objectives. 

Coblentz also received a second handwritten note stating, "Please invest the entire proceeds in my account at American Skandia #736 26887. Thank you." ("Note Two"). Coblentz stated that he "believes" that Deepa sent him Note Two. Coblentz said that his handwriting does not appear on Note Two. 

Coblentz stated that he did not sign the mutual fund application or authorize anyone to sign it on his behalf. He noted that the mutual fund application contains several errors, including an extra middle initial in his name and an incorrect mailing address. Coblentz's office telephone number was recorded in the space requesting his home telephone number. Coblentz said that his wife is the only person authorized to sign his name and stated that his wife did not sign his name to the Form W-9, Note Two, or the mutual fund application.

Sahai's Explanations 

Sahai said he either had "no role" or minimal involvement with paperwork and that his clerical staff was responsible for processing paperwork, obtaining customer signatures, and other administrative tasks. During this period, he employed part-time high school and college students who remained with his office for only short periods of time. Sahai was the only registered representative in his office. Dawn Iorio, who was hired as full-time office manager beginning in February 2000, acknowledged that she had sole responsibility for processing customer applications. 

Sahai denied that he had signed Note Two but was not sure whether his handwriting appeared on Note Two --- he admitted that the language authorizing the transaction was in his handwriting. 

Customer Sophia Ikonomou

Between 1999 and 2002, Sophia Ikonomou worked as an administrative assistant for Coblentz. In November or December 1999, she was notified by a former employer of the planned termination of her retirement plan. Ikonomou asked Coblentz and his wife for the name of someone to reinvest the funds held in the retirement account, and they recommended Sahai. In December 1999, she spoke to Sahai by telephone and informed him that she wanted her retirement funds invested in "a traditional IRA." According to Ikonomou, she received by facsimile transmission from Sahai's office an American Skandia Advisor Funds, Inc. ("American Skandia") "Mutual Fund Individual Retirement Account (IRA) Application" ("1999 Mutual Fund Application"), which she partially completed, signed, and dated December 17, 1999. She returned the IRA application to Sahai, but she did not complete the section of the 1999 Mutual Fund Application entitled "Fund Selection" (and no funds are selected thereon) and that she never discussed fund selection with Sahai. 

In January 2000, Ikonomou received from American Skandia a copy of a letter, dated January 18, 2000, that was addressed to Sahai. The letter stated that Ikonomou's signature was missing from her IRA application. She was confused by the letter because she specifically recalled signing her 1999 Mutual Fund Application prior to returning the application to Sahai. Ikonomou telephoned American Skandia to inquire about the status of her 1999 Mutual Fund Application. Ikonomou was informed that her funds had been used to purchase a variable annuity. 

Ikonomou testified that she then requested that American Skandia forward copies of the documents related to the annuity account. According to Ikonomou, in January 2000, American Skandia sent her copies of two documents: a "Mutual Fund Individual Retirement Account (IRA) Application" dated December 17, 1999 ("2000 Mutual Fund Application"), and a copy of a "Group Annuity Application for Participation" dated December 27, 1999 ("Annuity Application"). She said that she had never before seen either the 2000 Mutual Fund Application or the Annuity Application. Ikonomou stated that although the signatures appear similar, neither her handwriting nor her signature appears on either document. Ikonomou noted that her son's first and last names are misspelled in the beneficiary section of the Annuity Application. Ikonomou stated that she had never discussed particular mutual funds with Sahai and did not make the fund selections noted on the 2000 Mutual Fund Application (in fact, no mutual funds were purchased at Skandia for her). The annuity purchase was rescinded.

Sahai's Explanations 

Although Sahai initially stated that an American Skandia annuity was purchased with Ikonomou's knowledge and consent, he subsequently admitted that the transaction had been a "mistake" and a "clear error" resulting from a rush to comply with Ikonomou's wish for re-investment by year-end 1999.  Sahai admitted that the annuity had been unsuitable for Ikonomu, but noted that he would have earned between $300 to $300 in commission on either the mutual fund or annuity (suggesting he had no economic incentive for the latter purchase). 

Sahai admitted that his handwriting appears in the "Investment Dealer" section of the 2000 Mutual Fund Application, but denied signing Ikonomou's signature on the document or authorizing anyone else to do so. Sahai admitted also that it is "likely" that he wrote "The Key Group" on the Annuity Application.

NASD Investigation

On February 15, 2001, NASD sent Sahai a Rule 8210 written request for, among other things, the names and addresses of the employees that had been working for him at Key Group. At the request of Steven Mannion, who represented Sahai during the investigation, NASD extended the response date from March 1 to March 16, 2001. Sahai failed to respond by the extended deadline to NASD's request for information. 

On March 19, 2001, NASD sent Sahai a second letter informing Sahai that NASD had not received a response to its prior request and sought his reply. The March 19 letter further advised Sahai that, if he failed to respond, he could be subject to disciplinary action. In addition, the staff enclosed a copy of the relevant sanction guideline for failure to respond violations. The March 19 letter required a response by March 30, 2001. On March 26, 2001, Sahai's counsel responded to the request by providing the names of three of his former employees, Patrick Haas, Deepa Patel, and Chris Marra, stating that the addresses of the former employees "[had] not yet been located." The letter repeated that the former employees had been terminated because Sahai "was generally not satisfied" with their performance.  

On March 29, 2001, NASD staff sent a third request to Sahai informing him that they had received a partial response to its prior requests and again requested, among other things, the addresses of the former employees. The March 29 request also informed Sahai that he had an unconditional obligation to respond could not determine what information requested would be material to the investigation. The response date for this request was April 9, 2001. On April 3, 2001, Sahai's counsel responded that Sahai had provided all documents contained in his personal files and would continue to search for additional records, and that, if any were found, Sahai would produce them. The response also stated that "[u]ntil that time the response tendered is complete." The April 3 response did not include, among other things, the requested addresses of Sahai's former employees. On April 18, 2001, Sahai's counsel sent an additional response, stating that Sahai "is seeking that his former accountant voluntarily produce [the addresses and possibly telephone numbers of the employees] from the payroll records." 

On April 23, 2001, NASD sent Sahai a fourth request, again seeking the addresses of his former employees. On April 25, 2001, Sahai's counsel provided the last known address for Haas in Ridgefield, New Jersey, but stated that Sahai had not been able to locate addresses for the remaining two former employees, Patel and Marra. Sahai, through counsel, responded that, "These were temporary employees for whom records were not kept other than in a computer address book program which crashed sometime in 2000." The NASD investigator testified that he contacted "411" and that no one named Haas had been listed at the address identified by Sahai. He also attempted unsuccessfully to run an Internet search for Deepa Patel. 

On April 27, 2001, NASD sent Sahai a fifth request seeking: (1) the source from which Sahai obtained Haas's address; (2) Social Security numbers for Haas, Patel and Marra; (3) payroll records for Sahai's former employees or an explanation of how they were paid; and (4) any employment applications for Haas, Patel, and Marra. The response date for this request was May 11, 2001. Sahai failed to provide the requested information or an explanation of why he could not provide it. 

On May 10, 2001, NASD sent Sahai a written request reiterating its April 23 request for the addresses of his former employees. The May 10 request advised Sahai that, if he failed to respond, he could be subject to disciplinary action, and enclosed a copy of the relevant sanction guideline for failure to respond violations. The response date for the May 10 request was May 21, 2001. By letter dated May 10, 2001, Sahai's counsel informed NASD that Sahai could not locate the remaining addresses for his former employees. Counsel reiterated Haas's address and the fact that the computer address book had crashed. Sahai also did not provide the information requested in the April 27, 2001 request. 

On May 14, 2001, NASD sent Sahai a sixth and "final" request to produce, by May 24, 2001, the documents and information NASD had requested in the April 27, 2001 request. Sahai failed to provide the requested information or an explanation of why he could not provide the information. 

NASD Procedural Rule 8210. 
Provision of Information and Testimony and Inspection and Copying of Books 

(a) Authority of Adjudicator and Association Staff : For the purpose of an investigation, complaint, examination, or proceeding authorized by the NASD By-Laws or the Rules of the Association, an Adjudicator or Association staff shall have the right to: 
(1) require a member, person associated with a member, or person subject to the Association's jurisdiction to provide information orally, in writing, or electronically. . . and to testify at a location specified by Association staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and 
(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding. . . 

. . .

(c) Requirement to Comply: No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule. . . .

(d) Notice: A notice under this Rule shall be deemed received by the member or person to whom it is directed by mailing or otherwise transmitting the notice to the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository. . . .

 

The NASD subsequently filed charges against Sahai and a Hearing Panel found that Sahai caused the signatures of two customers to be forged on documents, engaged in an unauthorized transaction, and failed to respond to information requests, in violation of NASD Conduct Rule 2110 and Procedural Rule 8210. The Hearing Panel dismissed an allegation that Sahai was liable for engaging in outside business activities without proper notice to his member firm. The Hearing Panel determined that a unitary sanction was appropriate for all the violations found, and it barred Sahai in all capacities and assessed costs. 

On appeal, the NASD's National Adjudicatory Counsel (NAC) affirmed the findings and modified the sanctions of the Hearing Panel so that each violation was individually sanctioned.  The NAC imposed a bar in all capacities for the forgery violation and a second bar in all capacities for the failure to respond violation. The NAC thought a fine of $5,000 for the unauthorized transaction violation was appropriate, but due to the imposition of the bars, declined to impose it. 

Sahai appealed the NASD's decision to the SEC

NASD Business Conduct Rule 2110
Standards of Commercial Honor and Principles of Trade 

A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.

The SEC Appeal

Alleged Forgeries

DID SAHAI PROFIT/BENEFIT FROM THE ALLEGED FORGERIES?

The NASD found that Sahai forged or caused the forgery of the the Form W-9, Note Two, and the mutual fund application for Coblentz; and the 2000 Mutual Fund Application and Annuity Application in Ikonomou's name. In reaching that decision, the NASD largely credited the customers' testimony that they did not sign the allegedly forged documents. The NASD found that the forgeries violated Rule 2110 because they resulted in the misappropriation of customer funds or falsification of firm records. Donald M. Bickerstaff, 52 S.E.C. 232, 235 (1995).

Sahai admitted completing the dealer information on both the 2000 Mutual Fund Application and Annuity Application and writing the text of Note Two. Otherwise, he denied completing any of the alleged forged documents or signing Coblentz's or Ikonomou's signatures or authorizing anyone else to do so. 

Notwithstanding the NASD's finding that Sahai had profited from Coblentz's and Ikonomou's transactions, the SEC concluded that the alleged forgeries in Coblentz's name effectuated transactions that Coblentz confirmed that he had authorized and wanted to proceed. Moreover, the SEC found no evidence in the record that either Note One or Note Two (which contains, almost verbatim, the same language as Note One) was used for any purpose. 

Further, the SEC did not find that Sahai benefited from purchasing a variable annuity for Ikonomou instead of a mutual fund. The NASD examiner did not find the alternative trade egregious (and NASD imposed the minimal sanction available) and confirmed Sahai's contention that the commissions on either transaction were essentially the same.

In particularly blunt language (which I view as a critique of the manner in which the NASD Staff prepared and presented its case --- as well as the failure of the NASD Hearing Panel to insist upon a more credible record), the SEC stated that 

[T]hereis no evidence that Sahai personally signed the customers' signatures. Sahai's handwriting exemplars are not in the record. NASD did not produce original documents during the proceeding or engage a handwriting expert to analyze the allegedly forged signatures. Sahai asserts that other persons had an opportunity to affix the customers' signatures to the allegedly forged documents (e.g., Sahai's employees or employees of American Skandia). We note that Iorio and Mannion confirmed Sahai's testimony that he employed part-time workers and that he depended on them for administrative tasks, including obtaining customer signatures. 

DID SAHAI "CAUSE" THE ALLEGED FORGERIES?

The SEC next tackled the issue of whether it should sustain the NASD's finding that Sahai "caused" the forgery (rather than did the signings himself). As a threshold matter, the SEC said that it had only sustained findings that a respondent was responsible for causing a violation when there were affirmative acts or omissions by the applicant. Once again, in what I read as critical commentary about the NASD, the SEC admonishes that

The record is devoid of any evidence that Sahai performed any act that "caused" the alleged forgeries. There is no record evidence that Sahai either instructed anyone to forge the customer signatures or was aware that any customer signatures had been forged. In support of its assertion that Sahai forged or caused the forgery of Coblentz's Form W-9, NASD cites Coblentz's testimony regarding a conversation that Coblentz's wife assertedly had with a Bear Stearns employee about the employee's conversation with Sahai. According to Coblentz, when Bear Stearns contacted Sahai about the Form W-9, Sahai stated that Coblentz was present in his office and would execute the Form W-9. Coblentz stated that he had never been to Sahai's office. 

The SEC honed in on the NASD's reliance upon Coblentz's testimony as to his wife's conversation with Bear Stearns ---which was described as having three levels of hearsay: 

  1. What Sahai told Bear Stearns who told Coblentz's wife, who told Coblentz. 

  2. Coblentz's wife attended the hearing but did not testify. 

  3. No one from Bear Stearns testified. 

Although hearsay could be admissible, the SEC noted that the NASD Hearing Panel was required to evaluate its probative value, reliability, and fairness of use.  

In questioning the reliability of Coblentz's testimony,  Sahai argued that the client was upset because he lost money in the liquidation of the MIIX stock and because Sahai refused to deposit Coblentz's stock certificate proceeds in an IRA. Sahai contends that he informed Coblentz that this transaction was impermissible. Sahai asserts that Coblentz persisted because he wanted to shelter his assets from bankruptcy. Coblentz and his wife in fact filed for bankruptcy in 2000. NASD acknowledged that animosity may have existed between Coblentz and Sahai, but still deemed the client's testimony sufficiently credible.

Taking all the facts into consideration, the SEC described each of the cited levels of offered hearsay to be "oral, unsworn, and uncorroborated," and concluded that the statements were neither reliable nor probative.  Accordingly, the SEC was not able to find that Sahai forged or "caused" to be forged the customer signatures on the documents at issue, and set aside the NASD's finding of forgery.

Unauthorized Trade

The record established that Ikonomou instructed Sahai to open an IRA account for her and to purchase mutual funds in that account. Sahai admitted that Ikonomou wanted a mutual fund and, instead, a variable annuity was purchased for Ikonomou's account. Sahai admitted that the variable annuity transaction was a "mistake." Yet there is no record evidence that he initiated any steps to correct the error or to reduce any financial losses that Ikonomou might suffer due to the purchase of the annuity. A registered representative is obligated to follow the customer's instructions when effecting a security transaction for that customer's account. Sahai failed to do so. 

Accordingly, the SEC affirmed the NASD's finding that Sahai caused the execution of a transaction that was not authorized by Ikonomou in violation of Conduct Rule 2110. 

Failure to Provide Documents

NASD found that Sahai failed to respond to the requests for information dated April 27 and May 14, 2001, concerning the source for the address that he provided for Haas, and Social Security numbers, payroll records, sources of payment, and employment applications for two other former employees. NASD also determined that Sahai's other responses to NASD's requests for information were "varied, evasive, and incomplete." Sahai agreed to search for the information regarding his former employees. Sahai provided the purported name and address for only one former employee in response to NASD's written requests dated March 19 and April 23, 2001.

In April 2001, Sahai, for the first time, informed NASD that he did not keep employee records, other than in a computer address book program that had "crashed" during the previous year. Iorio was unable to identify precisely when the computer "crash" occurred, but she thought it might have been in early 2001. Iorio confirmed that some information that was maintained in the computer also was maintained in paper files in the office. Iorio testified that, following the computer crash, she was unable to retrieve from the computer's database program certain personnel information (e.g., name, address telephone number, and date of birth), client information, or payroll records. Iorio stated that she attempted to re-create the database from paper back-up files but does not know whether the paper files included those of Sahai's former employees or encompassed all of the data that was lost as a result of the computer crash. Iorio noted that there was a copy of her W-4 in Sahai's office and that she previously had sent a copy of the W-4 to Sahai's accountant. 

Sahai noted that he testified at length during his investigative testimony, as well as at the hearing. He asserted that he responded "to the best of his ability" to the inquiries about his former employees. However, the SEC concluded that Sahai did not respond at all to NASD's requests on April 27 and May 14, 2001 that he provide the source of the information about Haas' address, and the other requested information. Although Sahai had access to his accountant and bank (to obtain check records), there is no record evidence that he contacted either of them for information responsive to NASD's request. If Sahai could not readily provide the information that NASD requested, he had an obligation to explain, as completely as possible, his efforts and his inability to do so.  Sahai also argued that his retention of counsel demonstrated his good faith efforts to provide the information requested by NASD. The SEC dismissed this argument by reiterating its position that it is the responsibility of an associated person to respond directly to the NASD's requests for information, and not the responsibility of counsel. 

Although the SEC found that Sahai's failed to respond timely and fully to NASD's requests for information violated Rule 8210 --- the NASD barred Sahai for failure to provide the information it requested (an important distinction: doing something late and/or partially, versus not doing something at all). Sahai argued that the bar was excessive and inconsistent with NASD Sanction Guidelines. He argued that he did not ignore NASD's requests for information but responded on numerous occasions. The SEC seemed to agree that Sahai cooperated with certain NASD requests. Moreover, the SEC did not view the NASD's requests as simply reiterating from month to month the same allegedly unsatisfied demands.  Clearly, the SEC believed that certain of those requests changed and expanded over the period at issue. 

Once again, the SEC was upset at the state of the NASD's record of this matter.  Although, the SEC agreed that Sahai had not timely/fully responded, it wasn't satisfied that he had unequivocally failed to provide information, which appeared to have been the basis for the imposition of the bar. Based on the record, the SEC could not assess the appropriateness of the bar imposed on Sahai in light of NASD's Sanction Guidelines, which, in pertinent part state: "If the individual did not respond in any manner, a bar is standard. Where mitigation exists, or the person did not respond timely, consider suspending the individual in any or all capacities for up to two years."

The SEC Decision

ORDERED that the sanctions imposed by NASD on Rooney A. Sahai in this proceeding be vacated; and that the proceeding be remanded to NASD for further proceedings.

 

2007 UPDATE:  Pursuant to an SEC Decision (Securities Exchange Act Release # 55046 / January 5, 2007), the SEC only partially sustained the NASD's sanctions.  Specifically, the SEC set aside the Bar from association with any NASD member in all capacities imposed by NASD and reduced that proposed sanction to a two-year suspension  in all capacities.  The SEC also imposed a fine of $5,000.

 

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