| Paul K. Grassi. Jr., a registered
representative and NYSE member, was employed by CIBC World Markets
(CIBC) as a floor broker from February 1998 until July 2002. On May
1, 2002, Grassi, who suffered from chronic back pain, was examined
by a doctor at Comprehensive Health Services, Inc.
("CHS"), which operates a health clinic at the NYSE for
members, their employees, and NYSE employees. During the May visit,
a doctor wrote Grassi a prescription
for Vicodin. Grassi testified that when he went to fill the
prescription, he discovered that a
blank prescription form was attached to the form that had
been filled out by the doctor.
On June 10, Grassi returned to CHS complaining of back pain and a
different doctor wrote Grassi another prescription for Vicodin. The
doctor instructed Grassi to see his own physician and noted on
Grassi's chart that no
additional prescriptions for Vicodin would be written.
On the evening of June 12, Grassi requested that an acquaintance
complete the blank form (which Grassi had obtained during the May
visit) by writing a prescription for Vicodin and signing a CHS
doctor's name to the form. Grassi paid the acquaintance
approximately $20 to
complete the form and forge the doctor's name. The next day,
Grassi attempted to fill the prescription at a pharmacy located near
the Exchange. The pharmacist noticed that the signature was not that
of the doctor in question and called CHS to inquire about the
legitimacy of the prescription. CHS informed the pharmacist that the
CHS doctor did not write the prescription.
Arrest and Subsequent Dismissal of Criminal Charges
Grassi was subsequently arrested
and criminal charges brought by the New York County District
Attorney's office. The case against Grassi was adjourned in
contemplation of dismissal, a procedure whereby a case is adjourned
but remains open for six months in order for the court to monitor
the defendant's behavior. It appears from the record that the case
against Grassi was dismissed
six months after the court adjourned the matter.
December 2003 NYSE Hearing Panel Findings:
On December 3, 2003, a NYSE Hearing Panel unanimously found that
Grassi had engaged in acts detrimental to the
interest or welfare of the NYSE when he obtained the
prescription form, caused it to be completed and signed, and
presented the form to a pharmacy for the purpose of obtaining the
unauthorized prescription. The Hearing Panel found that the NYSE's
Division of Enforcement had not
established that Grassi's actions constituted conduct inconsistent
with just and equitable principles of trade or that he had failed to
comply timely with the investigation. The Hearing Panel
imposed a:
- Censure;
- 5 year bar from
membership, allied membership, approved person status, and from
employment or association in any capacity with any member or
member organization; and
- An additional 5 year
bar from NYSE membership.
June 2004 NYSE Board (appeal) Findings:
Grassi filed an appeal to the NYSE's Board of Directors (the
"Board"), and in a decision dated June 28, 2004, the Board
affirmed the Hearing Panel's findings with respect to guilt, but remanded
the matter to the Hearing Panel to provide a detailed explanation of
the factors it considered in its sanctions determination.
July 2004 NYSE Hearing Panel Supplemental Decision:
On July 12, 2004, the Hearing Panel issued a supplemental
decision in which it detailed the reasons supporting its sanctions
determination.
December 2004 NYSE Board (appeal) Findings:
On December 2, 2004, the Board again affirmed the Hearing Panel's
finding of guilt, but it modified
the sanctions imposed by the Hearing Panel so that the five-year
bar from membership would run concurrently with the five year
plenary bar.
For details concerning the above NYSE
history, visit In the Matter of Paul K. Grassi, Jr. (NYSE 03-217)
http://www.nyse.com/pdfs/03-217A.pdf
Grassi appealed to the SEC the NYSE's findings and sanctions. |
NYSE
Rule 476.
Disciplinary Proceedings Involving Charges Against Members, Member
Organizations, Allied Members, Approved Persons, Employees, or
Others
(a)
If a member, member organization, allied member, approved person, or
registered or non-registered employee of a member or member organization
or person otherwise subject to the jurisdiction of the Exchange is
adjudged guilty in a proceeding under this Rule of any of the following
offenses —
(1)
violating any provision of the Securities Exchange Act of 1934 or any rule
or regulation thereunder;
(2)
violating any of his or its agreements with the Exchange;
(3)
violating any provision of the Constitution or any Rule adopted by the
Board of Directors of the Exchange;
(4)
making a material misstatement to the Exchange;
(5)
fraud or fraudulent acts;
(6)
conduct or proceeding inconsistent with just and equitable principles of
trade;
(7)
acts detrimental to the interest or welfare of the Exchange;
(8)
making a fictitious bid, offer or transaction or giving an order for the
purchase or sale of securities the execution of which would involve no
change of beneficial ownership or executing such an order with knowledge
of its character;
(9)
making any purchases or sales or offers of purchase or sale of securities
for the purpose of upsetting the equilibrium of the market or bringing
about a condition in which prices will not fairly reflect market values,
or assisting in making any such purchases or sales with knowledge of such
purpose, or being, with such knowledge, a party to or assisting in
carrying out any plan or scheme for the making of such purchases or sales
or offers of purchase or sale;
(10)
having made a misstatement or omission of fact on his or its application
for membership or approval, or on any financial statement, report, or
other submission filed with the Exchange; or
(11)
refusing or failing to comply with a request of the Exchange to submit his
or its books and records . . .; or
if
a member who is registered as a specialist is adjudged guilty in a
proceeding under this Rule of substantial or continued failure to engage
in a course of dealings for his own account to assist in the maintenance,
so far as practicable, of a fair and orderly market in any security in
which he is registered;
then,
in any such event, the Hearing Panel shall, in accordance with the
procedures set forth in this Rule, impose one or more of the following
disciplinary sanctions . . .: expulsion; suspension; limitation as to
activities, functions, and operations, including the suspension or
cancellation of a registration in, or assignment of, one or more stocks;
fine; censure; suspension or bar from being associated with any member or
member organization; or any other fitting sanction . . .
|
SEC Considers the Appeal
On appeal to the SEC,
Grassi argued that the violation with which he is charged
-
did not
occur in connection
with his employment at a NYSE member firm;
-
was unrelated to the business of the
NYSE;
-
did not relate to any of his
duties or responsibilities on
the floor of the NYSE; and
-
did not impact any customer, employee, or
member of the NYSE.
Isn't
the NYSE's disciplinary authority limited to securities-related
business?
The SEC will not limit the NYSE's disciplinary authority to misconduct committed by a member in
the course of its
securities-related business.
When reviewing allegations that conduct is inconsistent with just and
equitable principles of
trade, the SEC has held repeatedly that a self-regulatory organization's
disciplinary authority is broad
enough to encompass conduct that does not involve a security if that
conduct reflects on a
person's ability to comply with the regulatory requirements of the
securities industry and to
fulfill his fiduciary duties. Similarly, the SEC finds that authority
applies to
acts detrimental to the
interests or welfare of the NYSE because the securities business depends
heavily on the integrity of
its participants.
Accordingly, the SEC found that Grassi's actions in paying someone to forge a
prescription slip and then using
that prescription to attempt to obtain medication illegally calls into
serious question his ability to
comply with the fundamental requirements of candor and truthful
representation required of
persons employed in the securities industry.
|
HOW FAR WILL THE SEC
STRETCH?
Vincent
Musso, 48 S.E.C. 1, 5 (1984):
Permits
disciplinary authority to extend to any member conduct that is
not inconsistent with a specific standard.
Jeffrey
Michael Miller, 51 S.E.C. 1027, 1028-29 (1994):
Sustaining
NYSE disciplinary action for, among other things, providing a falsified
letter to make it appear that the Exchange would pay a settlement
in an unrelated matter
William
Rembert, 51 S.E.C. 825, 826 n.3 (1993):
holding
in an appeal of NASD disciplinary action that Section 15A(b)(6) of
the Exchange Act empowers self-regulatory organizations to
discipline their members for unethical
behavior, as well as violations of law.
Daniel
D. Manoff, Securities Exchange Act Rel. No. 46708 (Oct. 23, 2002),
78 SEC Docket 2359, 2364; and
James
A. Goetz, 53 S.E.C. 472, 477 (1998):
addressing
NASD's rule requiring associated person to observe high standards
of commercial
honor and just and equitable principles of trade
Ivan M.
Kobey, 51 S.E.C. 204, 207 (1992)
holding
that the NYSE had jurisdiction to determine whether the conduct of
an employee of a member firm was fraudulent or inconsistent with
just and equitable principles of trade even though the instruments
involved in the transactions were commodities
and limited partnerships and not securities
DWS
Securities Corp.. 51 S.E.C. 814, 822 (1993):
holding
that NASD's disciplinary authority is broad enough to encompass
business-related conduct that is inconsistent with just and
equitable principles of trade, even if that activity
does not involve a security.
|
|
But
if Grassi had an addiction to Vicodin, wouldn't that have clouded
his mental state and possibly prevented him from fully appreciating
his conduct?
Grassi attempted to demonstrate that
- he had a Vicodin dependency;
- the treating physician did not take appropriate steps to treat
that addiction; and
- his Vicodin addiction prevented him from forming the state of
mind (scienter) necessary to truly know what he was doing.
In fairly dismissive terms, the SEC states that Grassi failed to
establish how the inadequacy of his medical treatment by doctors at
CHS is material to the charges against him. The SEC states that a
finding of bad faith or unethical conduct is sufficient for
sustaining a violation of an ethical rule such as Rule 476(a).
Although the Hearing Panel permitted Grassi's expert witness to
testify with respect to the effects of Vicodin and the possible
state of mind of an individual addicted to Vicodin, the SEC did not
discern any exculpatory evidence with respect to his state of mind
at the time of the events in questions. Moreover, Grassi testified
that his conduct was "very inappropriate" and that he
"knew it was wrong." In other words, he knew that by
submitting the forged prescription he was acting unethically and in
bad faith. This is all that is required to establish his violation
of Rule 476(a)(7).
What about the
allegation on appeal to the SEC that members of the Hearing Panel
had previously used the same CHS doctor whose treatment was being
challenged? Doesn't that raise some conflicts?
Although the NYSE Hearing Officer disclosed, on the record, that
he and the members of the Hearing
Panel previously had been treated by the CHS doctor, Grassi
never raised his claim of bias before the NYSE Panel. In any event,
the SEC did not find that Grassi articulated the nature of any
alleged bias. The CHS doctor testified that the signature that
appeared on the prescription form in question was not his signature
and that he did not knowingly provide a blank prescription form to
Grassi. |
Calvin
David Fox, Exchange Act Rel. No. 48731 (Oct. 31, 2003), 81 SEC
Docket 2017, 2020-21
holding
that with respect to conduct alleged to be inconsistent with just
and equitable principles of trade in violation of Rule 476(a)(6),
the NYSE
need not
establish that respondent acted with scienter, but must find that
the respondent acted in bad faith or unethically
Robert
E. Kauffman, 51 S.E.C. 838, 839-40 (1993); aff'd,
40 F.3d 1240 (3rd Cir. 1994)
holding
that a violation of NASD's rule prohibiting conduct inconsistent
with just and equitable principles of trade does not require a
finding that respondent acted with scienter, but requires a finding
of bad faith or unethical conduct
Stephen
Russell Boadt, 51 S.E.C. 683, 685 (1993)
holding
in an appeal from NASD disciplinary action that an applicant must
object to the composition of a hearing panel at a time when the
alleged defect could have been remedied
|
Appropriate Sanctions?
Once a Self-Regulatory
Organization finds a violation, can the fairness of the sanctions they
impose be challenged with any success?
That's a very important question and one that all respondents should
ask their lawyers. Even if you've been found guilty of a violation
by an SRO, that doesn't mean that they can just impose any sanction they
choose. The appropriate
sanction depends on the facts and circumstances of each particular
case.
How did the NYSE select
the sanctions in the case against Grassi?
The NYSE examined a number of their prior cases involving a finding of
conduct inconsistent with just and equitable principles of trade, and then
attempted to extrapolate the sanctions imposed in those cases to Grassi.
Why isn't that fair?
Although the NYSE charged Grassi with conduct inconsistent with
just and equitable principles of trade, the Panel and Board
specifically ruled that the burden of proof for that charge was not
met. He was found to have engaged in conduct
detrimental to the interest or welfare of the NYSE. Think
of it this way. You're charged with murder and assault, and after a
trial, the jury finds you not guilty of murder but guilty of
assault. How would you feel if the judge imposed a life sentence
based upon reviewing the sentences historically imposed in murder
cases?
Further, the "just and equitable" cases cited by the NYSE in
support of the sanctions it imposed on Grassi involved abuse
of expense accounts or use of funds mistakenly deposited into an account
Clearly, that line of cases implicate the member's ability to handle other
people's money more directly than prescription forgery involving Grassi.
What remedy did the SEC
propose to rectify the uncertainty?
On remand, the parties should more fully develop whether, under the
circumstances of this case, the concurrent five-year bars are consistent
with the purposes of the Exchange Act.
SEC Decision
Sustained NYSE's findings of violations but remanded for
reconsideration of the sanctions imposed.
|
IN
A NUTSHELL
I
don't want to go too overboard here in my criticism of the sanctions
in the case. Without question, the conduct at issue is
troubling --- not just for the criminal allegations but also because
of the dangers of self-medicating and using powerful prescriptions
without a doctor's consultation. To be fair to the NYSE, this is
likely a case of first impression and there may well have been no
prior precedence to reference. I mean how many NYSE floor
brokers have been arrested for forging a doctor's signature on a
prescription form? If the NYSE is guilty of anything, it may
simply be that it failed to adequately explain why it imposed the
sanctions it did upon Grassi. Hopefully, that will be remedied
by the SEC's remand for reconsideration.
Still,
the issues and ramifications of this case are very troubling, if not
frightening.
Grassi's
criminal case was adjourned and dismissed.
Let
me state that once more, for effect. His criminal case was
adjourned and dismissed.
Isn't
the NYSE essentially re-trying him for the very same underlying
conduct that a criminal court considered? Moreover, Grassi's
conduct appears to have been an isolated incident that did not
relate to any of his duties or responsibilities on the NYSE floor
and did not directly impact any customer, employee, or member of the
Exchange. How does such conduct harm the integrity and reputation of
the NYSE? What about folks who smoke in no-smoking
zones? What about folks who drink too much at a party?
It's not so much a question of where it ends, as it is a question of
where does it begin? That's the issue I think Grassi is
credibly raising.
Do
individuals employed on Wall Street have any privacy rights --- to
put it more bluntly, do they have a life outside of work? Look
at the wall of restrictions that has been built one unassuming brick
at a time. You can't post comments on the Internet. You can't
send or receive "personal" emails. You need to have
pre-approval of radio/television appearances. Personal indiscretions
that do not appear job-related have regulatory consequences.
Is Wall Street nothing more than a police state?
And
if we're going to bar Grassi for 5 years for what may well be a
disability --- an addiction to Vicodin --- then what other areas
should the NYSE be investigating? What is the going rate for a
first-time driving under the influence? What is the going rate
for sexual discrimination or harassment? What is the going
rate for racial discrimination or harassment? What is the
going rate for misuse of a Form U5 to interfere with a departing
broker's ability to compete? Why don't we see regulatory
action against those acts that would also seem to harm the NYSE's
credibility and welfare?
Interesting
when it comes to the politics of SRO enforcement. No? |
|
